Exchange Rate Pass-Through And The Welfare Effects Of The Euro



This article explores the implications of the European single currency within a simple sticky price intertemporal model. We focus on the question of how the euro may change the sensitivity of consumer prices in Europe to exchange-rate changes. Our central conjecture is that the acceptance of the euro will lead European prices to become more insulated from exchange-rate volatility. We find that this affects both the volatility and levels of macroeconomic aggregates in both the U.S. and Europe. We find that European welfare is enhanced, and the U.S. shares in Europe's good fortune.