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Market Conduct, Price Interdependence and Exchange Rate Pass-Through

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  • 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 develops an international oligopoly model where foreign and domestic firms simultaneously choose their pricing strategies under the assumption of non-zero conjectural variations. The model captures the links between domestic and foreign producers’ prices and establishes a relationship between the price of domestically produced goods and the exchange rate, which appears to be important for the determination of exchange rate pass-through. It is also found that the equilibrium pass-through elasticity can be less than, equal to or greater than one depending on exporting and domestic firms’ conjectural variations. The empirical implications of the model are tested with the Johansen multivariate cointegration technique using data for Japanese firms’ exports to the US market. The results indicate that US producer prices are indeed influenced by the prices of their Japanese competitors and that the pass-through elasticity is less than one.

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Bibliographic Info

Paper provided by Bank of Greece in its series Working Papers with number 51.

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Length: 37 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:bog:wpaper:51

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Keywords: Money demand; Exchange rate pass-through; Conjectural variations; Translog expenditure function; Multivariate cointegration;

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References

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Citations

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Cited by:
  1. Kiril Danailov Kossev, 2008. "The Banking Sector and the Great Depression in Bulgaria, 1924 - 1938: Interlocking and Financial Sector Profitability," Working Papers 76, Bank of Greece.
  2. Roumen Avramov & Dragana Gnjatovic, 2008. "Stabilization Policies in Bulgaria and Yugoslavia During Communism's Terminal Years : 1980s Economic Visions in Retrospect," Working Papers 81, Bank of Greece.
  3. Stephan Barisitz, 2008. "Banking Transformation (1989 - 2006) in Central and Eastern Europe - With Special Reference to Balkans," Working Papers 78, Bank of Greece.
  4. Zarko Lazarevic, 2008. "Banking Performance in South-Eastern Europe During the Interwar Period," Working Papers 79, Bank of Greece.
  5. Peter Bernholz, 2008. "Government Bankruptcy of Balkan Nations and their Consequences for Money and Inflation before 1914: A Comparative Analysis," Working Papers 74, Bank of Greece.
  6. Alexander Apostolides, 2008. "How Similar to South-Eastern Europe were the Islands of Cyprus and Malta in terms of Agricultural Output and Credit? Evidence during the Interwar Period," Working Papers 80, Bank of Greece.

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