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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.

Suggested Citation

  • Paul R. Bergin & Robert C. Feenstra, 2009. "Pass‐Through of Exchange Rates and Competition between Floaters and Fixers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(s1), pages 35-70, February.
    • Handle: RePEc:wly:jmoncb:v:41:y:2009:i:s1:p:35-70
    DOI: 10.1111/j.1538-4616.2008.00198.x
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    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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