TY  - JOUR
AU  - Baldwin,Richard
AU  - Lyons,Richard K.
TI  - The Mutual Amplification Effect of Exchange Rate Volatility and Unresponsive Trade Prices
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2677
PY  - 1988
Y2  - August 1988
UR  - http://www.nber.org/papers/w2677
L1  - http://www.nber.org/papers/w2677.pdf
N1  - Author contact info:
Richard Baldwin
Cigale 2
1010 Lausanne
SWITZERLAND
Tel: 41-22-908-5900
E-Mail: rbaldwin@cepr.org

Richard K. Lyons
460 Michigan Ave
Berkeley, CA 94707
Tel: 510-642-1059
Fax: 510-642-4700
E-Mail: lyons@haas.berkeley.edu
AB  - The volatility of flexible exchange rates greatly exceeds what most analysts anticipated at the advent of generalized floating. The Dornbusch overshooting model accounts for the fact that exchange rates fluctuate more than the underlying fundamentals. This paper presents a model which may help account for why exchange rates have been even more volatile than the overshooting model would suggest, and why trade prices have been so unresponsive in recent years. The paper employs an extended version of the sticky-price monetary model of exchange rates and a simple industrial organization model of import pricing. The combined macro-JO. model shows that exchange rate volatility and unresponsive trade prices can be mutually amplifying.
ER  -