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Exchange rate pass-through in a competitive model of pricing-to-market

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  • Thomas Chaney
  • Raphael

Abstract

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.

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Bibliographic Info

Article provided by Board of Governors of the Federal Reserve System (U.S.) in its journal Proceedings.

Volume (Year): (2008)
Issue (Month): ()
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Handle: RePEc:fip:fedgpr:y:2008:x:8

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Keywords: Foreign exchange rates ; Econometric models;

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References

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  2. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2005. "DSGE models of high exchange-rate volatility and low pass-through," International Finance Discussion Papers 845, Board of Governors of the Federal Reserve System (U.S.).
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Citations

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Cited by:
  1. Raphael Anton Auer & Thomas Chaney & Philip Ulrich Sauré, 2012. "Quality Pricing-to-Market," Working Papers 2012-11, Swiss National Bank.
  2. Raphael Auer, 2011. "Exchange rate pass-through, domestic competition and inflation -- evidence from the 2005/08 revaluation of the Renminbi," Globalization and Monetary Policy Institute Working Paper 68, Federal Reserve Bank of Dallas.
  3. Eike Berner, 2010. "Exchange rate pass-through: new evidence from German micro data," Economie Internationale, CEPII research center, issue 124, pages 75-100.
  4. Berner, Eike & Birg, Laura, 2012. "Retailers and Consumers: The pass-through of import price changes," Center for European, Governance and Economic Development Research Discussion Papers 133, University of Goettingen, Department of Economics.
  5. Raphael Anton Auer, 2010. "Consumer Heterogeneity and the Impact of Trade Liberalization: How Representative is the Representative Agent Framework?," Working Papers 2010-13, Swiss National Bank.
  6. Xavier Gabaix & David Laibson & Deyuan Li & Hongyi Li & Sidney Resnick & Casper G. de Vries, 2013. "The Impact of Competition on Prices with Numerous Firms," Working Papers 13-07, Chapman University, Economic Science Institute.
  7. Fauceglia, Dario & Shingal, Anirudh & Wermelinger, Martin, 2012. ""Natural hedging" of exchange rate risk: The role of imported input prices," MPRA Paper 39438, University Library of Munich, Germany.
  8. Emi Nakamura & Jón Steinsson, 2009. "Lost in Transit: Product Replacement Bias and Pricing to Market," NBER Working Papers 15359, National Bureau of Economic Research, Inc.
  9. Berner, Eike & Birg, Laura, 2012. "Retailers and Consumers: The pass-through of import price changes," Center for European, Governance and Economic Development Research Discussion Papers 133, University of Goettingen, Department of Economics.
  10. Raphael Anton Auer & Philip Ulrich Sauré, 2011. "Spatial Competition in Quality, Demand-Induced Innovation, and Schumpeterian Growth," Working Papers 2011-10, Swiss National Bank.
  11. Raphael Auer, 2009. "Product Heterogeneity, Within-Industry Trade Patterns, and the Home Bias of Consumption?," Working Papers 09.05, Swiss National Bank, Study Center Gerzensee.
  12. Philippe Andrade, 2010. "Competition and Pass-through on international markets: Firm-level evidence from VAT shocks," 2010 Meeting Papers 820, Society for Economic Dynamics.

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