The study shows that in an open-economy model, exchange rates can be very volatile and the impact of exchange rate changes on prices can be limited. Price differences between countries lead to incomplete adjustment of prices to exchange rate changes. Even a small amount of inflexible prices can reduce the effect of exchange rate changes on prices. Exchange rate depreciation can worsen the terms of trade between countries. Studies using real-world data may have errors due to missing information, but estimates can still capture important features of the model.