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A model of exchange rate pass-through

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  • Eric O'N. Fisher

Abstract

Exchange rate pass-through is the phenomenon whereby changes in the value of foreign exchange are reflected in changes in import prices. This paper presents a model in which firms are price setters who anticipate exchange rate changes. In equilibrium, firms' strategies incorporate expectations about the exchange rate consistently and are best responses to the strategies of all others in the world market. It is shown that exchange rate changes give rise to import price changes, but the degree of exchange rate pass-through depends upon domestic and foreign market structures and the exchange rate regime. In general, exchange rate pass-through is higher if the home market is monopolistic or if the foreign market is competitive. The paper concludes with an examination of disaggregated Japanese manufacturing price indices, and it shows that the degree of exchange rate pass-through was indeed correlated with industry concentration during the most recent period of the yen's depreciation against the dollar.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 302.

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Date of creation: 1987
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Handle: RePEc:fip:fedgif:302

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Related research

Keywords: Foreign exchange rates;

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Cited by:
  1. Robert C. Feenstra & Joseph E. Gagnon & Michael M. Knetter., 1993. "Market share and exchange rate pass-through in world automobile trade," International Finance Discussion Papers 446, Board of Governors of the Federal Reserve System (U.S.).
  2. Cabral, Luis M. B. & Mello, Antonio S., 1997. "Exchange rate expectations and market shares," Economics Letters, Elsevier, vol. 55(1), pages 61-67, August.
  3. Michael Melvin & Jahangir Sultan, 1990. "The choice of an invoicing currency in international trade and the balance of trade impact of currency depreciation," Open Economies Review, Springer, vol. 1(3), pages 251-268, October.
  4. Ahtiala, Pekka & Orgler, Yair E., 1995. "The optimal pricing of exports invoiced in different currencies," Journal of Banking & Finance, Elsevier, vol. 19(1), pages 61-77, April.
  5. Richard Damania, 1998. "The Scope for Exchange Rate Pass-through in an Oligopoly," School of Economics Working Papers 1998-07, University of Adelaide, School of Economics.
  6. Phillip Swagel, 1995. "Import prices and the competing goods effect," International Finance Discussion Papers 508, Board of Governors of the Federal Reserve System (U.S.).
  7. Chang Byoung-Ky, 2001. "Exchange Rate Pass-Through in an International Duopoly model with Brand Loyalty," International Economic Journal, Taylor & Francis Journals, vol. 15(1), pages 41-59.
  8. Webber, A., 1999. "Dynamic and Long Run Responses of Import Prices to the Exchange Rate in the Asia-Pacific," Economics Working Papers WP99-11, School of Economics, University of Wollongong, NSW, Australia.
  9. Reginaldo P. Nogueira Jnr, 2006. "Inflation Targeting, Exchange Rate Pass-Through and 'Fear of Floating'," Studies in Economics 0605, Department of Economics, University of Kent.
  10. Goldberg, Linda S. & Tille, Cédric, 2008. "Vehicle currency use in international trade," Journal of International Economics, Elsevier, vol. 76(2), pages 177-192, December.
  11. Reginaldo P. Nogueira Jnr, 2006. "Inflation Targeting and the Role of Exchange Rate Pass-through," Studies in Economics 0602, Department of Economics, University of Kent.
  12. Ilan Goldfajn & Sérgio Ribeiro da Costa Werlang, 2000. "The Pass-through from Depreciation to Inflation: A Panel Study," Working Papers Series 5, Central Bank of Brazil, Research Department.
  13. Friberg, Richard, 1996. "On the Role of Pricing Exports in a Third Currency," Working Paper Series in Economics and Finance 128, Stockholm School of Economics.
  14. Thorsten Hens, 1997. "Exchange rates and perfect competition," Journal of Economics, Springer, vol. 65(2), pages 151-161, June.
  15. Ayoub Yousefi, 2000. "Merchandise Trade Balances of Less Developed Countries and Exchange Rate of the U.S. Dollar: Cases of Iran, Venezuela & Saudi Arabia," Working Papers 00002, University of Waterloo, Department of Economics, revised Feb 2000.
  16. Eckart Jäger, 1999. "Exchange rates and bertrand oligopoly," Journal of Economics, Springer, vol. 70(3), pages 281-307, October.
  17. International Monetary Fund, 2012. "Exchange Rate Pass-Through in Sub-Saharan African Economies and its Determinants," IMF Working Papers 12/141, International Monetary Fund.
  18. Hens, Thorsten & Jager, Eckart & Kirman, Alan & Phlips, Louis, 1999. "Exchange rates and oligopoly," European Economic Review, Elsevier, vol. 43(3), pages 621-648, March.

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