This paper explores the hypothesis that high volatility of real and nominal exchange rates may be due to the fact that local currency pricing eliminates the pass-through from changes in exchange rates to consumer prices. Exchange rates may be highly volatile because in a sense they have little effect on macroeconomic variables. The paper shows the ingredients necessary to construct such an expl...

This study examines the significant impact of exchange rate shock on prices of Malaysian importsand exports. In methodology, the study adopts vector error correction (VECM) model using monthlydata of nominal exchange rates, money supply, prices of imports and prices of exports covering theperiod of M1:1999 to M12:2006. For further analysis, we adopt an innovation accounting bysimulating varianc...

The macroeconomic evidence on the short-term impact of exchange rates on exports and prices is notoriously weak. In this paper I examine the micro-foundations of this disconnect by looking at firms’ export and price setting decisions in response to fluctuations in exchange rates and credit conditions using German firm survey data. Firmlevel data on pricing and export expectations enables me to ...

We propose a candidate solution to the imperfect exchange rate passthrough puzzle: habit persistence at the level of individual goods varieties. Deep habits generate a dynamic import demand function that leads to import price markup adjustments, independently of nominal pricing frictions. Augmenting a standard two-country model with deep habits, we obtain low exchange rate pass-through to impor...