Devaluation and pass-through in indebted and risky economies

This paper develops a structural general equilibrium model to analyse the pass-through from devaluation to producer and consumer prices in Emerging Market Economies (EMEs). Simulation analysis shows that balance-sheet effects created by capital market imperfections and the home bias shrink the impac...

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Bibliographic Details
Published inInternational review of economics & finance Vol. 19; no. 1; pp. 36 - 45
Main Authors García-Solanes, José, Torrejón-Flores, Fernando
Format Journal Article
LanguageEnglish
Published Greenwich Elsevier Inc 2010
Elsevier
Elsevier Science Ltd
SeriesInternational Review of Economics & Finance
Subjects
Currency devaluation
Devaluation
Devaluation Pass-through Emerging market economies
Economic models
Emerging market economies
Emerging markets
Pass-through
Prices
Simulation
Studies
Pass-through
E52
Devaluation
F21
Emerging market economies
F33
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Summary:This paper develops a structural general equilibrium model to analyse the pass-through from devaluation to producer and consumer prices in Emerging Market Economies (EMEs). Simulation analysis shows that balance-sheet effects created by capital market imperfections and the home bias shrink the impact of devaluation on both types of internal prices. This finding helps explain why pass-through to internal prices is low in EMEs. It also shows that, for benchmark values of the parameters, devaluation remains a good device to modify the real exchange rate and to mitigate the negative impact of external shocks in EMEs.
ISSN:1059-0560
1873-8036
DOI:10.1016/j.iref.2009.02.008