DP5250 Modeling Exchange Rate Passthrough After Large Devaluations

Author(s): Ariel Tomas Burstein, Martin Eichenbaum, Sérgio Rebelo
Publication Date: September 2005
Keyword(s): devaluations, exchange rate, passthrough, sticky prices
JEL(s): F31
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5250

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.