Discussion Paper Details

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Title: Modeling Exchange Rate Passthrough After Large Devaluations

Author(s): Ariel Tomas Burstein, Martin Eichenbaum and Sérgio Rebelo

Publication Date: September 2005

Keyword(s): devaluations, exchange rate, passthrough and sticky prices

Programme Area(s): International Macroeconomics

Abstract: Large devaluations are generally associated with large declines in real exchange rates. We develop a model which embodies two complementary forces that account for the large declines in the real exchange rate that occur in the aftermath of large devaluations. The first force is sticky nontradable goods prices. The second force is the impact of real shocks that often accompany large devaluations. We argue that sticky nontradable goods prices generally play an important role in explaining post-devaluation movements in real exchange rates. However, real shocks can sometimes be primary drivers of real exchange rate movements.

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Bibliographic Reference

Burstein, A, Eichenbaum, M and Rebelo, S. 2005. 'Modeling Exchange Rate Passthrough After Large Devaluations'. London, Centre for Economic Policy Research.