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An estimated two-country EA-US model with limited exchange rate pass-through. National Bank of Belgium Working Paper No. 317

de Walque, Gregory and Jeanfils, Philippe and Lejeune, Thomas and Rychalovska, Yuliya and Wouters, Raf (2017) An estimated two-country EA-US model with limited exchange rate pass-through. National Bank of Belgium Working Paper No. 317. [Working Paper]

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    Abstract

    We develop a two-country New Keynesian model with sticky local currency pricing,distribution costs and a demand elasticity increasing with the relative price. These features help to reduce the exchange rate pass-through to import price at the border and down the chain towards consumption price, both in the short and the long run. Oil and imported goods enter at the same time as inputs in the production process and as consumption components. The model is estimated using Bayesian full information maximum likelihood techniques and based on real and nominal macroeconomic series for the euro area and the United States together with the bilateral exchange rate and oil prices. The estimated model is shown to perform well in an out-of-sample forecasting exercise and is able to reproduce most of the cross-series co-variances observed in the data. It is then used for forecast error variance decomposition and historical decomposition exercises.

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    Item Type: Working Paper
    Uncontrolled Keywords: Open-economy macroeconomics, DSGE models, exchange-rate pass through, Bayesian inference, forecasting, policy analysis
    Subjects for non-EU documents: EU policies and themes > External relations > EU-US
    EU policies and themes > Policies & related activities > economic and financial affairs > general
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > National Bank of Belgium (Brussels) > Working Papers
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 29 Nov 2019 16:29
    Number of Pages: 95
    Last Modified: 29 Nov 2019 16:29
    URI: http://aei.pitt.edu/id/eprint/97457

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