Exchange Rate Pass-Through in a Competitive Model of Pricing-to-Market

Auer, Raphael and Chaney, Thomas (2009) Exchange Rate Pass-Through in a Competitive Model of Pricing-to-Market. Journal of Money, Credit and Banking, 41 (1).

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This paper extends the Mussa and Rosen (1978) model of quality pricing
under perfect competition. Exporters sell goods of different qualities to consumers
who have heterogeneous preferences for quality. Production is subject
to decreasing returns to scale and, therefore, supply and the toughness
of competition react to cost changes brought about by exchange rate fluctuations.
First, we predict that exchange rate shocks are imperfectly passed
through into prices. Second, prices of low-quality goods are more sensitive
to exchange rate shocks than prices of high-quality goods. Third, in response
to an exchange rate appreciation, the composition of exports shifts toward
higher quality and more expensive goods. We test these predictions using
highly disaggregated price and quantity U.S. import data and find only weak
empirical evidence in support of our theory.

Item Type: Article
Language: English
Date: February 2009
Refereed: Yes
JEL codes: F11 - Neoclassical Models of Trade
F14 - Country and Industry Studies of Trade
L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
L16 - Industrial Organization and Macroeconomics - Industrial Structure and Structural Change; Industrial Price Indices
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 09 Jul 2014 17:29
Last Modified: 07 Mar 2018 13:22

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