Brown Bag Lunch
Thursday (exceptionally) 26 March 2009
12h15 - R3¨
Sebastian Weber and Pascal Towbin
“Limits of floats: The role of foreign currency liabilities and pass-through”
Abstract: The traditional argument in favor of flexible exchange rates emphasizes the expenditure switching effect and the stabilization of relative prices. The recent theoretical literature finds this argument weakened with high foreign currency debt or low exchange rate pass trough to import prices. We analyze the transmission of terms of trade shocks and world real interest rate shocks to the domestic economy under fixed and flexible exchange rate regimes for a broad sample of countries in a Panel VAR and let the responses vary with foreign currency indebtedness and a pass-through measure. We find that flexible exchange rates do not insulate output better from real shocks if pass-through is low and can even amplify the output response if foreign indebtedness is high, making a peg potentially preferable.
