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Pass-Through of Exchange Rates and Competition between Floaters and Fixers

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  • PAUL R. BERGIN
  • ROBERT C. FEENSTRA

Abstract

This paper studies how a rise in the share of U.S. imports from China, or any country with a fixed exchange rate, can explain a disproportionate fall in exchange rate pass-through to U.S. import prices. A theoretical model provides an explanation working through changes in markups, showing that a particular "local bias" condition is necessary and that free entry amplifies the effect. The model produces a structural equation for pass-through regressions including the China share; panel regressions over 1993-2006 indicate that the rising share of trade from China or other exchange rate fixers can explain as much as one-half of the observed decline in pass-through for the United States. Copyright (c) 2009 The Ohio State University.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 41 (2009)
Issue (Month): s1 (02)
Pages: 35-70

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Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:s1:p:35-70

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Paul R. Bergin & Robert C. Feenstra, 1998. "Staggered Price Setting and Endogenous Persistence," NBER Working Papers 6492, National Bureau of Economic Research, Inc.
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  12. José Manuel Campa & Linda S. Goldberg, 2005. "Exchange Rate Pass-Through into Import Prices," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 679-690, November.
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