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International Financial Market Integration, Asset Compositions and the Falling Exchange Rate Pass-Through

Buzaushina, Almira ; Enders, Zeno ; Hoffmann, Mathias

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This paper provides an explanation for the observed decline of the exchange rate pass-through into import prices by modeling the effects of financial market integration on the optimal choice of the pricing currency in the context of rigid nominal goods prices. Contrary to previous literature, the interdependence of this choice with the optimal portfolio choice of internationally traded financial assets is explicitly taken into account. In particular, price setters move towards more local-currency pricing while the debt portfolio includes more foreign assets following increased financial integration. Both predictions are in line with novel empirical evidence.

Item Type: Working paper
Series Name: Discussion Paper Series, University of Heidelberg, Department of Economics
Volume: 0569
Place of Publication: Heidelberg
Date Deposited: 18 Jun 2014 11:52
Date: June 2014
Number of Pages: 37
Faculties / Institutes: The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics
Subjects: 330 Economics
Uncontrolled Keywords: Exchange rate pass-through, financial integration,portfolio home bias, international price setting
Schriftenreihe ID: Discussion Paper Series / University of Heidelberg, Department of Economics
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