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Market Power, Innovative Activity and Exchange Rate Pass-Through

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Author Info

  • Sophocles N. Brissimis

    () (Bank of Greece, Economic Research Department and University of Piraeus)

  • Theodora S. Kosma

    (Bank of Greece, Economic Research Department)

Abstract

This paper considers an international oligopoly where firms simultaneously choose both the amount of output produced and the proportion of R&D investment to output. The model captures the links between the exchange rate, market power, innovative activity and price, which are important for the determination of the optimal degree of exchange rate pass-through. It is found that in the long run the pass-through elasticity can be less than, equal to or greater than one depending on R&D effectiveness but in any case it is higher than in models that do not endogenise innovation decisions. The empirical implications of the model are tested using data for Japanese firms exporting to the US market and applying the Johansen multivariate cointegration technique. Particular attention is given to the estimation and identification of the equilibrium price and R&D-intensity equations. The empirical results indicate that price-setting and R&D-intensity decisions of firms are jointly determined in the long run. This interdependence must be taken into account if an accurate estimate of the exchange rate pass-through is to be obtained.

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Bibliographic Info

Paper provided by Bank of Greece in its series Working Papers with number 22.

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Length: 32 pages
Date of creation: Apr 2005
Date of revision:
Handle: RePEc:bog:wpaper:22

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Web page: http://www.bankofgreece.gr
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Related research

Keywords: Exchange rate pass-through; market power; innovative activity; multivariate cointegration;

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References

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Citations

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Cited by:
  1. Hans Genberg, 2006. "Exchange-Rate Arrangements and Financial Integration in East Asia: On a Collision Course?," Working Papers 152006, Hong Kong Institute for Monetary Research.
  2. George A. Christodoulakis & Stephen E Satchell, 2006. "Exact Elliptical Distributions for Models of Conditionally Random Financial Volatility," Working Papers 32, Bank of Greece.
  3. John Williamson, 2008. "A Worldwide System of Reference Rates," Working Papers 130, Oesterreichische Nationalbank (Austrian Central Bank).
  4. Sophocles N. Brissimis & Theodora S. Kosma, 2005. "Market power, innovative activity and exchange rate pass-through in the euro area," Working Paper Series 531, European Central Bank.
  5. Otmar Issing, 2006. "Europe's Hard Fix: The Euro Area," Working Papers 39, Bank of Greece.
  6. Eleni Angelopoulou, 2005. "The Comparative Performance of Q-type and Dynamic Models of Firm Investment: Empirical Evidence from the UK," Working Papers 27, Bank of Greece.
  7. George S. Tavlas & P.A.V.B. Swamy, 2006. "The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation," Working Papers 34, Bank of Greece.
  8. Alexandros E. Milionis, 2006. "An Alternative Definition of Market Efficiency and some Comments on its Empirical Testing," Working Papers 50, Bank of Greece.
  9. Kerstin Stahn, 2011. "Changes in Import Pricing Behaviour: Evidence for Germany," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 231(4), pages 522-545, August.
  10. Alan Ahearne & Jürgen von Hagen, 2006. "European perspectives on global imbalances," Working Papers 50, Bruegel.

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