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Exchange rate pass-through and fiscal multipliers

  • Chak Hung Jack Cheng EMAIL logo
Published/Copyright: September 26, 2013
The B.E. Journal of Macroeconomics
From the journal The B.E. Journal of Macroeconomics Volume 13 Issue 1

Abstract

This paper develops a small open economy model with nominal rigidities and search-matching frictions to study the implications of the degree of exchange rate pass-through for fiscal multipliers. I allow for delayed pass-through to both imported consumption goods prices and imported intermediate goods prices. The result shows that incomplete exchange rate pass-through to imported goods prices dampens the fiscal impact on output and unemployment. However, incomplete pass-through to imported input prices has little effect on the output and unemployment multipliers.

Keywords: exchange rate pass-through; fiscal multipliers; unemployment
Corresponding author: Chak Hung Jack Cheng, Economics and Finance, Murray State University, 307K Business Building, Murray, Ky 42071, USA, Tel.: +270-809-6763, e-mail:
  1. 1

    See Baldacci and Gupta (2009).

  2. 2

    Although more recent studies find that exchange rate pass-through in emerging economies may have decreased in the past decade, the rate of pass-through in many emerging markets, such as Mexico and Chile, is still higher than that in developed countries. See Ca’Zorzi, Hahn, and Sanchez (2007).

  3. 3

    Also see Hummels, Ishii, and Yi (1998), Yi (2003) and Kleinert (2003).

  4. 4

    As pointed out by Devereux, Lane, and Xu (2006), strict CPI inflation targeting is essentially equivalent to a fixed exchange rate regime when exchange rate pass-through is high. In other words, with high exchange rate pass-through, adjustments of exchange rates to shocks are limited under inflation targeting. Thus, the result is in line with Ilzetzki, Mendoza, and Vegh (2013)’s finding that fiscal multipliers are larger in countries with fixed exchange rates.

  5. 5

    Also see, for example, Ramey and Shapiro (1998), Burnside, Eichenbaum, and Fisher (2004), Perotti (2008) and Ramey (2009).

  6. 6

    See Schmitt-Grohe and Uribe (2003) for further details.

  7. 7

    Without loss of generality, I assume that both and are constant and set their values to 1.

  8. 8

    See Petrongolo and Pissarides (2001) and Monacelli, Perotti, and Trigari (2010).

  9. 9

    The data for Mexico comes from OECD database.

  10. 10

    Instead of solely looking at how the multipliers are affected by each key parameter, I also examined the output and unemployment multipliers generated across different parameter sets. The main result remains robust.

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Published Online: 2013-09-26
Published in Print: 2013-01-01

©2013 by Walter de Gruyter Berlin Boston

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https://doi.org/10.1515/bejm-2012-0014
Keywords for this article
exchange rate pass-through; fiscal multipliers; unemployment

Articles in the same Issue

  1. Masthead
  2. Masthead
  3. Advances
  4. How have global shocks impacted the real effective exchange rates of individual euro area countries since the euro’s creation?
  5. Employment by age, education, and economic growth: effects of fiscal policy composition in general equilibrium
  6. Overeducation and skill-biased technical change
  7. Strategic wage bargaining, labor market volatility, and persistence
  8. Households’ uncertainty about Medicare policy
  9. Contributions
  10. Deconstructing shocks and persistence in OECD real exchange rates1)
  11. A contribution to the empirics of welfare growth
  12. Development accounting with wedges: the experience of six European countries
  13. Implementation cycles, growth and the labor market
  14. International technology adoption, R&D, and productivity growth
  15. Bequest taxes, donations, and house prices
  16. Business cycle accounting of the BRIC economies
  17. Privately optimal severance pay
  18. Small business loan guarantees as insurance against aggregate risks
  19. Output growth and unexpected government expenditures
  20. International business cycles and remittance flows
  21. Effects of productivity shocks on hours worked: UK evidence
  22. A prior predictive analysis of the effects of Loss Aversion/Narrow Framing in a macroeconomic model for asset pricing
  23. Exchange rate pass-through and fiscal multipliers
  24. Credit demand, credit supply, and economic activity
  25. Distortions, structural transformation and the Europe-US income gap
  26. Monetary policy shocks and real commodity prices
  27. Topics
  28. News-driven international business cycles
  29. Business cycle dynamics across the US states
  30. Required reserves as a credit policy tool
  31. The macroeconomic effects of the 35-h workweek regulation in France
  32. Productivity and resource misallocation in Latin America1)
  33. Information and communication technologies over the business cycle
  34. In search of lost time: the neoclassical synthesis
  35. Divorce laws and divorce rate in the US
  36. Is the “Great Recession” really so different from the past?
  37. Monetary business cycle accounting for Sweden
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