Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/77396
Authors: 
Towbin, Pascal
Weber, Sebastian
Year of Publication: 
2010
Series/Report no.: 
HEID Working Paper 01/2010
Abstract: 
A traditional argument in favor of flexible exchange rates is that they insulate output better from real shocks, because the exchange rate can adjust and stabilize demand for domestic goods through expenditure switching. This argument is weakened in a model with high foreign currency debt and low exchange rate pass through to import prices. We analyze the transmission of real external 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 import structure. We find that flexible exchange rates do not insulate output better from external shocks if the country imports mainly low pass-through goods and can even amplify the output response if foreign indebtedness is high.
Subjects: 
Exchange Rate Regimes
Balance Sheet Effects
Pass-through
Interacted Panel VAR
External Shocks
JEL: 
E30
F33
F34
F41
Document Type: 
Working Paper

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