What Prompts the Transmission of Exchange Rate Movements into International Prices?

What is the causal effect of exchange rates on international prices over time when the state of the economy is continuously shifting? This thesis demonstrates that the existing reduced-form estimates of exchange rate pass-through are biased, at the very least over the longer term, and raises concerns over the long-standing disconnect between the average causal effect and the dynamic causal effect. A unique methodology is then developed to quantify an unbiased measure of exchange rate transmission at the firm-level from their observed co-movements at the aggregate level. In this framework, exchange rate impact on the transition path of prices from vintages to the inter-temporal optimum is determined by a compromise between economic structure and stochastic innovations. The blueprint builds on a micro-founded multi-country business cycle model that disciplines the structural parameters by the data on macroeconomic fundamentals using the method of moments. The substance of the quantitative predictions are exposited by addressing two broad research questions at the forefront of the policy debate in international economics. Specifically, (i) “What Drives the Terms of Trade Neutrality to Exchange Rates? "; and (ii) “Why Are Import Prices More Elastic To Local Currency Depreciations Than Appreciations?"