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Market structure and exchange rate pass-through

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  • Raphael A. Auer
  • Raphael S. Schoenle

Abstract

In this paper, we examine the extent to which market structure and the way in which it affects pricing decisions of profit-maximizing firms can explain incomplete exchange rate pass-through. To this purpose, we evaluate how pass-through rates vary across trade partners and sectors depending on the mass and size distribution of firms affected by a particular exchange rate shock. In the first step of our analysis, we decompose bilateral exchange rate movements into broad US Dollar (USD) movements and trade-partner currency (TPC) movements. Using micro data on US import prices, we show that the passthrough rate following USD movements is up to four times as large as the pass-through rate following TPC movements and that the rate of pass-through following TPC movements is increasing in the trade partner's sector-specific market share. In the second step, we draw on the parsimonious model of oligopoly pricing featuring variable markups of Dornbusch (1987) and Atkeson and Burstein (2008) to show how the distribution of firms' market shares and origins within a sector affects the trade-partner specific pass-through rate. Third, we calibrate this model using our exchange rate decomposition and information on the origin of firms and their market shares. We find that the calibrated model can explain a substantial part of the variation in import price changes and pass-through rates across sectors, trade partners, and sector-trade partner pairs.

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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 130.

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Date of creation: 2012
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Handle: RePEc:fip:feddgw:130

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Keywords: Price levels;

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Citations

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Cited by:
  1. Linda Goldberg & Cedric Tille, 2013. "A bargaining theory of trade invoicing and pricing," Globalization and Monetary Policy Institute Working Paper 144, Federal Reserve Bank of Dallas.
  2. Mary Amiti & Oleg Itskhoki & Jozef Konings, 2012. "Importers, exporters, and exchange rate disconnect," Staff Reports 586, Federal Reserve Bank of New York.
  3. Raphael Auer & Kathrin Degen & Andreas M. Fischer, 2011. "Low-Wage Import Competition, Inflationary Pressure, and Industry Dynamics in Europe," Working Papers 11.02, Swiss National Bank, Study Center Gerzensee.
  4. 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.
  5. Olivier de Bandt & Tovonony Razafindrabe, 2014. "Does nominal rigidity mislead our perception of the exchange rate pass-through?," EconomiX Working Papers 2014-36, University of Paris West - Nanterre la Défense, EconomiX.
  6. Gee Hee Hong & Nicholas Li, 2013. "Market Structure and Cost Pass-Through in Retail," Working Papers 13-5, Bank of Canada.
  7. Ariel Burstein & Gita Gopinath, 2013. "International Prices and Exchange Rates," NBER Working Papers 18829, National Bureau of Economic Research, Inc.
  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.
  9. Nicholas Li, 2014. "Sticker Shock: The Causes of the Canada-US Price Differential," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 409, May.
  10. Gopinath, Gita & Itskhoki, Oleg & Neiman, Brent, 2012. "Trade Prices and the Global Trade Collapse of 2008–09," Scholarly Articles 11988099, Harvard University Department of Economics.
  11. Nicholas Li & Gee Hee Hong, 2013. "Market Structure and Cost Pass-Through in Retail," Working Papers tecipa-470, University of Toronto, Department of Economics.

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