Transmission of Exchange-Rate Variations in an Estimated, Small Open-Economy Model

40 Pages Posted: 16 Dec 2005

Date Written: September 15, 2005

Abstract

This paper addresses the transmission of exchange-rate variations in an estimated, small open-economy model. In contrast to the standard set-up of New Open Economy Macroeconomics models, imported goods are treated here as material inputs to production. The resulting model structure is transparent and tractable while also able to account for imperfect pass through of exchange-rate shocks. The model is estimated with Bayesian methods on German data and the key finding is that a substantial depreciation of the nominal exchange rate leads to only modest effects on CPI-inflation. An extended version of the model reveals that relatively small weight is placed on foreign consumption.

Keywords: DSGE Model, exchange-rate pass through, Bayesian estimation

JEL Classification: E43, E52, C51

Suggested Citation

Welz, Peter, Transmission of Exchange-Rate Variations in an Estimated, Small Open-Economy Model (September 15, 2005). Available at SSRN: https://ssrn.com/abstract=870549 or http://dx.doi.org/10.2139/ssrn.870549

Peter Welz (Contact Author)

European Central Bank ( email )

Kaiserstrasse 29
Frankfurt am Main, DE D-60311
Germany

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