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Market Structure and Exchange Rate Pass-Through

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  • Raphael S. Schoenle

    ()
    (Economics Department, Brandeis University)

  • Raphael A. Auer

    ()
    (Swiss National Bank)

Abstract

In this paper, we first document that two predictions of the heterogeneous firm version of the Dornbusch (1987) pricing model are confirmed in micro data on US import prices: while the rate at which a firm reacts to changes in its own cost is U-shaped in market share, the rate at which it reacts to competitors’ prices is hump-shaped in market share. Second, using the theory as a guidance, we present an expression for price changes in industry equilibrium that can be broken down into a component due to the direct cost response at the firm level, and another one due to price complementarities faced by the firm at the industry level. We show empirically that taking into account a sector’s market structure and the interplay of heterogeneity in reaction to own cost and reaction to the competition can substantially improve our understanding of the variation in pass-through rates across sectors and trade partners. The direct imperfect cost pass-through channel and the indirect price complementarity channel play approximately equally important roles in determining pass-through but partly offset each other. Including only one of these channels in an empirical analysis results in a failure to explain variation in the aggregate equilibrium rate of pass-through.

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File URL: http://www.brandeis.edu/departments/economics/RePEc/brd/doc/Brandeis_WP62.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by Brandeis University, Department of Economics and International Businesss School in its series Working Papers with number 62.

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Length: 39 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:brd:wpaper:62

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Postal: MS032, P.O. Box 9110, Waltham, MA 02454-9110
Web page: http://www.brandeis.edu/departments/economics/
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Related research

Keywords: Exchange Rate Pass-Through; U.S. Import Prices; Market Structure; Price Complementarities;

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References

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Citations

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Cited by:
  1. Goldberg, Linda S. & Tille, Cédric, 2013. "A bargaining theory of trade invoicing and pricing," CEPR Discussion Papers 9447, C.E.P.R. Discussion Papers.
  2. Raphael A Auer & Philip Sauré, 2013. "The globalisation of inflation: a view from the cross section," BIS Papers chapters, in: Bank for International Settlements (ed.), Globalisation and inflation dynamics in Asia and the Pacific, volume 70, pages 113-118 Bank for International Settlements.
  3. Raphael Anton Auer & Kathrin Degen & Andreas M. Fischer, 2011. "Low-Wage Import Competition, Inflationary Pressure,and Industry Dynamics in Europe," Working Papers 2011-09, Swiss National Bank.
  4. Ariel Burstein & Gita Gopinath, 2013. "International Prices and Exchange Rates," NBER Working Papers 18829, National Bureau of Economic Research, Inc.
  5. Mary Amiti & Oleg Itskhoki & Jozef Konings, 2012. "Importers, exporters, and exchange rate disconnect," Working Paper Research 238, National Bank of Belgium.
  6. Nicholas Li & Gee Hee Hong, 2013. "Market Structure and Cost Pass-Through in Retail," Working Papers tecipa-470, University of Toronto, Department of Economics.
  7. Gee Hee Hong & Nicholas Li, 2013. "Market Structure and Cost Pass-Through in Retail," Working Papers 13-5, Bank of Canada.
  8. Adachi, Takanori & Ebina, Takeshi, 2014. "Double marginalization and cost pass-through: Weyl–Fabinger and Cowan meet Spengler and Bresnahan–Reiss," Economics Letters, Elsevier, vol. 122(2), pages 170-175.

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