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DISINFLATION AND EXCHANGE-RATE PASS-THROUGH

Published online by Cambridge University Press:  01 April 2008

OZGE SENAY
OZGE SENAY*
Affiliation:
Middle East Technical University
*
Address correspondence to: Department of Economics, Middle East Technical University, Inonu Bulvari, Ankara 06531, Turkey; e-mail: osenay@metu.edu.tr.
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Abstract

This paper analyzes exchange-rate dynamics following a money-based disinflation under different degrees of exchange-rate pass-through. Using a microfounded dynamic general equilibrium model with imperfect competition and nominal rigidities, it is shown that a monetary slowdown causes an appreciation of the exchange rate and a short-run fall in employment. Varying the degree of pass-through, however, significantly alters the magnitudes of these effects. As the degree of pass-through is reduced, the extent of the short-run appreciation of the exchange rate increases and the short-run impact of the disinflation on employment falls.

Keywords

DisinflationExchange RatesPass-throughNew Open Economy Macroeconomics
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 12 , Issue 2 , April 2008 , pp. 234 - 256
Copyright
Copyright © Cambridge University Press 2008

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