Working Paper

Expectations and exchange rate dynamics: a state-dependent pricing approach

Abstract: We introduce elements of state-dependent pricing and strategic complementarity into an otherwise standard New Open Economy Macroeconomics (NOEM) model. Relative to previous NOEM works, there are new implications for the dynamics of real and nominal economic activity: complementarity in the timing of price adjustment alters an open economy's response to monetary disturbances. Using a two-country Producer-Currency-Pricing environment, our framework replicates key international features following a domestic monetary expansion: (i) a delayed surge in inflation across countries, (ii) a delayed overshooting of exchange rates, (iii)a J-curve dynamic in the domestic trade balance, and (iv) a high international output correlation relative to consumption correlation. Overall, the model is consistent with many empirical aspects of international economic fluctuations, while stressing pricing behavior and exchange rate effects highlighted in traditional Keynesian works.>

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2006

Number: 0604

Note: Published as: Landry, Anthony (2009), "Expectations and Exchange Rate Dynamics: A State-Dependent Pricing Approach," Journal of International Economics 78 (1): 60-71.