The Mutual Amplification Effect of Exchange Rate Volatility and Unresponsive Trade Prices / Richard Baldwin, Richard K. Lyons.

Format:

Book

Author/Creator:

Baldwin, Richard.

Contributor:

National Bureau of Economic Research.

Lyons, Richard K.

Series:

Working Paper Series (National Bureau of Economic Research) no. w2677.

NBER working paper series no. w2677

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1988.

Summary:

The volatility of flexible exchange rates greatly exceeds what most analysts anticipated at the advent of generalized floating. The Dornbusch overshooting model accounts for the fact that exchange rates fluctuate more than the underlying fundamentals. This paper presents a model which may help account for why exchange rates have been even more volatile than the overshooting model would suggest, and why trade prices have been so unresponsive in recent years. The paper employs an extended version of the sticky-price monetary model of exchange rates and a simple industrial organization model of import pricing. The combined macro-JO. model shows that exchange rate volatility and unresponsive trade prices can be mutually amplifying.

Notes:

Print version record

August 1988.