This paper explores the hypothesis that high volatility of real and nominal exchange rates may be due to the fact that local currency pricing eliminates the pass-through from changes in exchange rates to consumer prices. Exchange rates may be highly volatile because in a sense they have little...

This paper studies the implications of Europe's single market. Small costs of international trade in goods and services may cause a large home bias in consumer spending and can explain seemingly excessive short-run exchange rate volatility. The European single market (declining costs of...