Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/161922 
Year of Publication: 
2017
Series/Report no.: 
CESifo Working Paper No. 6483
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
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, we take the interdependence of this decision with the optimal portfolio choice of internationally traded financial assets explicitly into account. In particular, price setters move towards more local-currency pricing and portfolios include more foreign debt assets following increased financial integration. Both predictions are in line with novel empirical evidence.
Subjects: 
exchange rate pass-through
financial integration
portfolio home bias
international price setting
JEL: 
F41
F36
F31
Document Type: 
Working Paper
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