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A model of exchange rate pass-through

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Author Info
Eric O'N. Fisher

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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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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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  1. Eckart Jäger, 1999. "Exchange rates and bertrand oligopoly," Journal of Economics, Springer, vol. 70(3), pages 281-307, October. [Downloadable!] (restricted)
  2. Byoung-Ky Chang, 2001. "Exchange Rate Pass-Through In An International Duopoly Model With Brand Loyalty," International Economic Journal, Korean International Economic Association, vol. 15(1), pages 41-59, April. [Downloadable!] (restricted)
  3. 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. [Downloadable!]
  4. 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. [Downloadable!]
  5. Ilan Goldfajn & Sergio R.C. Werlang, 2000. "The pass-through from depreciation to inflation : a panel study," Textos para discussão 423, Department of Economics PUC-Rio (Brazil). [Downloadable!]
  6. 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. [Downloadable!]
  7. Robert Feinberg & Mieke Meurs, 2005. "Exchange Rate Effects on Domestic Prices in Bulgaria and Poland: Progress in Making Markets?," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 12(2), pages 273-288, July. [Downloadable!] (restricted)
  8. 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. [Downloadable!]
  9. 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. [Downloadable!]
  10. Anthony G. Webber, 1995. "Partial Small Country Import Pass-Through, Currency Composition, And Imported Inputs," International Economic Journal, Korean International Economic Association, vol. 9(4), pages 13-30, December. [Downloadable!] (restricted)
  11. Michael M. Knetter, 1995. "Pricing To Market In Response To Unobservable And Observable Shocks," International Economic Journal, Korean International Economic Association, vol. 9(2), pages 1-25, June. [Downloadable!] (restricted)
  12. 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. [Downloadable!] (restricted)
  13. 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.). [Downloadable!]
    Other versions:
  14. 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. [Downloadable!]
  15. Thorsten Hens, 1997. "Exchange rates and perfect competition," Journal of Economics, Springer, vol. 65(2), pages 151-161, June. [Downloadable!] (restricted)
  16. 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.). [Downloadable!]
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