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Prices and Exchange Rates: A Theory of Disconnect

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  • Jose Antonio Rodriguez Lopez

    ()
    (Department of Economics, University of California-Irvine)

Abstract

I present a sticky-wage model of exchange rate pass-through with heterogeneous producers and endogenous markups. The model shows that low levels of exchange rate pass-through to firm- and aggregate-level import prices coexist with large in trade flows. After an exchange rate shock, aggregate import prices are subject to a composition bias due to changes in the extensive margin of trade (the number of goods traded between countries). At the firm level, each producer adjusts its markups depending on its own productivity and the change in the competitive environment generated by the exchange rate movement. Firm-level price responses are asymmetric---different for appreciations and depreciations---and adjustments in the intensive margin of trade (firm-level exports) are substantial. In general equilibrium, the model shows that firm reallocations increase the persistence exogenous shocks.

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Bibliographic Info

Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 080902.

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Length: 51 pages
Date of creation: Jul 2008
Date of revision: Sep 2010
Handle: RePEc:irv:wpaper:080902

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Keywords: Exchange rate pass-through; Expenditure switching regime; Heterogenous firms; Endogenous markups;

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Citations

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Cited by:
  1. Noton, Carlos, 2009. "Structural Estimation of Price Adjustment Costs in the European Car Market," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt29643386, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Inga Heiland & Wilhelm Kohler, 2013. "Heterogeneous Workers, Trade, and Migration," CESifo Working Paper Series 4387, CESifo Group Munich.
  3. Emi Nakamura & Jón Steinsson, 2012. "Lost in Transit: Product Replacement Bias and Pricing to Market," American Economic Review, American Economic Association, American Economic Association, vol. 102(7), pages 3277-3316, December.
  4. Matteo Cacciatore, 2013. "Trade, Unemployment, and Monetary Policy," 2013 Meeting Papers, Society for Economic Dynamics 724, Society for Economic Dynamics.
  5. Matteo Cacciatore & Giuseppe Fiori & Fabio Ghironi, 2013. "Market Deregulation and Optimal Monetary Policy in a Monetary Union," NBER Working Papers 19025, National Bureau of Economic Research, Inc.
  6. Novy, Dennis, 2010. "International Trade without CES: Estimating Translog Gravity," CAGE Online Working Paper Series, Competitive Advantage in the Global Economy (CAGE) 32, Competitive Advantage in the Global Economy (CAGE).
  7. Natalie Chen & Luciana Juvenal, 2014. "Quality, Trade, and Exchange Rate Pass-Through," IMF Working Papers, International Monetary Fund 14/42, International Monetary Fund.
  8. Roberto Basile & Sergio de Nardis & Alessandro Girardi, 2012. "Pricing to market, firm heterogeneity and the role of quality," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 148(4), pages 595-615, December.
  9. Cacciatore, Matteo, 2014. "International trade and macroeconomic dynamics with labor market frictions," Journal of International Economics, Elsevier, Elsevier, vol. 93(1), pages 17-30.
  10. Spearot, Alan C., 2013. "Variable demand elasticities and tariff liberalization," Journal of International Economics, Elsevier, Elsevier, vol. 89(1), pages 26-41.
  11. Cooke, Dudley, 2014. "Monetary shocks, exchange rates, and the extensive margin of exports," Journal of International Money and Finance, Elsevier, Elsevier, vol. 41(C), pages 128-145.
  12. Cook, Jonathan Aaron, 2014. "The effect of firm-level productivity on exchange rate pass-through," Economics Letters, Elsevier, Elsevier, vol. 122(1), pages 27-30.

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