Entry dynamics and the decline in exchange-rate pass-through
AbstractThe degree of exchange-rate pass-through to import prices is low. An average passthrough estimate for the 1980s would be roughly 50 percent for the United States implying that, following a 10 percent depreciation of the dollar, a foreign exporter selling to the U.S. market would raise its price in the United States by 5 percent. Moreover, substantial evidence indicates that the degree of pass-through has since declined to about 30 percent. ; Gust, Leduc, and Vigfusson (2010) demonstrate that, in the presence of pricing complementarity, trade integration spurred by lower costs for importers can account for a significant portion of the decline in pass-through. In our framework, pass-through declines solely because of markup adjustments along the intensive margin. ; In this paper, we model how the entry and exit decisions of exporting firms affect passthrough. This is particularly important since the decline in pass-through has occurred as a greater concentration of foreign firms are exporting to the United States. ; We find that the effect of entry on pass-through is quantitatively small and is more than offset by the adjustment of markups that arise only along the intensive margin. Even though entry has a relatively small impact on pass-through, it nevertheless plays an important role in accounting for the secular rise in imports relative to GDP. In particular, our model suggests that over 3/4 of the rise in the U.S. import share since the early 1980s is due to trade in new goods. ; Thus, a key insight of this paper is that adjustment of markups that occur along the intensive margin are quantitatively more important in accounting for secular changes in pass-through than adjustments that occur along the extensive margin.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2010-23.
Date of creation: 2010
Date of revision:
Other versions of this item:
- Christopher Gust & Sylvain Leduc & Robert Vigfusson, 2010. "Entry dynamics and the decline in exchange-rate pass-through," International Finance Discussion Papers 1008, Board of Governors of the Federal Reserve System (U.S.).
- NEP-ALL-2010-10-16 (All new papers)
- NEP-CBA-2010-10-16 (Central Banking)
- NEP-INT-2010-10-16 (International Trade)
- NEP-MON-2010-10-16 (Monetary Economics)
- NEP-OPM-2010-10-16 (Open Economy Macroeconomic)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Cédric Durand & Antonia Lòpez-Villavicencio, 2011. "On the link between distribution's margins and exchange rates: the role of globalization," CEPN Working Papers hal-00611862, HAL.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Rosenberger).
If references are entirely missing, you can add them using this form.