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Camila Casas, Mr. Federico J Diez, Ms. Gita Gopinath, and Pierre-Olivier Gourinchas
Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) the terms-of-trade is stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports, driven by the dollar exchange rate while exports respond weakly, if at all; (e) strengthening of the dominant currency relative to non-dominant ones can negatively impact global trade; (f) optimal monetary policy targets deviations from the law of one price arising from dominant currency fluctuations, in addition to the inflation and output gap. Using data from Colombia we document strong support for the dominant currency paradigm.
International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper focuses on Venezuelan migration and the labor market. Over 2 million migrants have crossed the border from Venezuela and continue to join Colombia’s labor market—which remains weak overall with rising unemployment and falling participation. There is so far little evidence of displacement effects on account of immigration, however, as the Colombian informal sector has capably absorbed most of the migrant inflow. A more granular view of Colombia’s local labor markets does not show weaker employment outcomes in those that have received the most migrants. However, with many of these workers being highly skilled and attached to the informal sector, evidence of labor misallocation highlights the need to continue integration policies. The government is conducting efforts to accelerate the validation of Venezuelan degrees for easing the integration of professional migrants and high-school educated migrants who wish to continue their university studies in Colombia.
International Monetary Fund. Western Hemisphere Dept.

.1. N 4 9. Import volumes are quite responsive after a depreciation . The estimated value for Colombia’s imports volumes (of η M v = − 0.6 ) is in line with those for other countries. However, estimates of the offsetting pass-through to peso prices are of a similar magnitude ( η M v = 0.6 ) ( Bussiere and others, 2018 ). Focusing on manufacturers, volume and price effects also broadly cancel, though both volume responses and pass-through to peso prices are closer to 1. Pass-through to peso prices is especially high over horizons shorter than 2 years ( Casas and

Mr. Robert P Flood

goods are aggregated through a CES function represented by C t H = [ ∫ 0 1 C j t θ θ - 1 d j ] θ θ - 1 , θ > 1. ( A .12 ) Assume also that the imported good has a fixed price, normalized to one, in terms of a foreign currency, which we shall refer to as the dollar . Also, we assume that imports are freely traded and that the Law of One Price holds, so that the peso price

Timothy D. Sweeney

effect resulting from the increased peso prices of exports whose dollar prices are set in a world market. In Mexico, for example, an increase in the peso prices of minerals means higher peso profits for the mining industry, in which much of Mexico’s foreign capital is invested, and larger peso dividend payments on investment services account. In the case of the Mexican devaluations, however, this indirect effect was considerably weakened by the imposition in August 1948 of a 15 per cent ad valorem export tax, which practically halved the effect of the devaluation on

International Monetary Fund

pressures and exchange rate pressures. The approach is similar in spirit as Hooker (2002) and De Gregorio, Landerretche, and Neilson (2008). The estimation uses quarterly data on CPI inflation, with lags of inflation, the unemployment rate gap (as a commonly used proxy of the output gap) and the nominal effective exchange rate as well as changes in the peso price of world fuel and food prices as explanatory variables: ( 1 ) π t = α + δ ⋅ Σ i = 1 2 π t − i + φ ⋅ Σ

Mr. Omotunde E. G. Johnson and Joanne Salop

are apt to be good indicators of movements in the ratio of the prices of nontraded goods to those of traded goods, since the nominal wage in the export sector is likely to keep pace with prices there if the prices of nontraded goods rise as fast as export prices. The situation in Bolivia illustrates the effects of devaluation when demand restraint is not pursued. Nominal wages rose in the mining sector by more than 100 per cent between October 1972 and January 1974, when the average peso price for exports rose by just under 100 per cent. In contrast, in the

Mr. Olivier D Jeanne and Mr. Charles Wyplosz

vulnerable to a self-fulfilling twin crisis, there is nothing that the domestic authorities can do about it by manipulating the domestic interest rate. One may dig out the economic intuition behind this result by going back to the condition for bank solvency, equation(3) . The solvency of banks is determined by one variable: the time 1 dollar price of time 2 pesos, S 2 e / ( 1 + i * ) . Under UIP, his price can be decomposed as the product of two terms, the time 1 peso price of a time 2 peso, and the time 1 exchange rate: P * = 1 1 + i

Rudolf R. Rhomberg

argument set forth in this paper relies on the effects under (1) and leaves out of account those under (2). In regard to changes in valuation, inflation in the host country will—if exchange rates are assumed to remain constant—tend to increase the dollar equivalent of receipts from local sales ( Sp s ), of local costs ( Cp c ), and probably also of local taxes ( Tp t ). If, on the other hand, constant peso prices are assumed, depreciation of a unitary exchange rate ( r = r x = r m = r c ) will tend to reduce the dollar equivalent of local sales, costs, and taxes. 8

Mr. Olivier D Jeanne
This paper considers how an international lender of last resort (LOLR) can prevent self-fulfilling banking and currency crises in emerging economies. We compare two different arrangements: one in which the international LOLR injects liquidity into international financial markets, and one in which its resources are used to back domestic banking safety nets. Both arrangements would require important changes in the global financial architecture: the first one would require a global central bank issuing an international currency, while the second one would have to be operated by an "international banking fund" closely involved in the supervision of domestic banking systems.