Buzaushina, Almira ; Enders, Zeno ; Hoffmann, Mathias
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Abstract
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.
Document type: | Working paper |
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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 |
DDC-classification: | 330 Economics |
Uncontrolled Keywords: | Exchange rate pass-through, financial integration,portfolio home bias, international price setting |
Series: | Discussion Paper Series / University of Heidelberg, Department of Economics |