MACROECONOMIC ASPECTS OF EXCHANGE-RATE PASS-THROUGH

This paper addresses the cause of the variability in exchange rate pass-through. We develop a model in which foreign exporters, setting prices under uncertainty, infer the value of domestic income and prices based upon their observation of the exchange rate and their knowledge of the stochastic structure of the economy. This inference problem links pass-through to the underlying stochastic macroeconomic structure of the economy rather than the source, direction, or size of the endogenous exchange rate movement that period. The predictions of the model are consistent with pass-through experience in the United States during the past decade. © 1990.