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Exchange Rate Pass-Through When Market Share Matters

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  • Kenneth A. Froot
  • Paul Klemperer

Abstract

We investigate pricing to market when the exchange rate changes in cases where firms' future demands depend on their current market shares. We show that i) profit maximizing foreign firms may either raise or lower their domestic currency export prices when the domestic exchange rate appreciates temporarily (i.e. the "pass-through" from exchange rate changes to import prices may be perverse); ii) current import prices may be more sensitive to the expected future exchange rate than to the current exchange rate; iii) current import prices fall in response to an increase in uncertainty about the future exchange rate. We present evidence that suggests the behavior of expected future exchange rates may provide a clue to the puzzling behavior of U.S. import prices during the 1980s.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2542.

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Date of creation: Oct 1989
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Handle: RePEc:nbr:nberwo:2542

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  1. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  2. Frankel, Jeff & Froot, Ken, 1986. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," Department of Economics, Working Paper Series qt1972q8wm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Richard Baldwin & Paul R. Krugman, 1986. "Persistent Trade Effects of Large Exchage Rate Shocks," NBER Working Papers 2017, National Bureau of Economic Research, Inc.
  4. Meese, R. & Rogoff, K., 1988. "Was It Real? The Exchange Rate-Interest Differential Ralation Over The Modern Floating-Rate Period," Working papers 368, Wisconsin Madison - Social Systems.
  5. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
  6. Arthur M. Okun, 1975. "Inflation: Its Mechanics and Welfare Costs," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 351-402.
  7. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
  8. J.-P. Fitoussi & E. S. Phelps, 1986. "Causes of the 1980s Slump in Europe," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 487-520.
  9. Robert B. Barsky & Lawrence H. Summers, 1990. "Gibson's Paradox and the Gold Standard," NBER Working Papers 1680, National Bureau of Economic Research, Inc.
  10. Jeffrey A. Frankel & Kenneth A. Froot, 1987. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
  11. Paul R. Krugman & Richard E. Baldwin, 1987. "The Persistence of the U.S. Trade Deficit," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(1), pages 1-56.
  12. Catherine L. Mann, 1986. "Prices, profit margins, and exchange rates," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jun, pages 366-379.
  13. Farrell, Joseph & Shapiro, Carl, 1986. "Dynamic Competition with Lock-In," Department of Economics, Working Paper Series qt1d43h5sq, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  14. Edmund S. PHELPS, 1986. "The Significance of Customers Markets for the Effects of Budgetary Policy in Open Economies," Annales d'Economie et de Statistique, ENSAE, issue 3, pages 101-117.
  15. Klemperer, Paul, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 375-94, May.
  16. Baldwin, Richard, 1990. "Hysteresis in Trade," Empirical Economics, Springer, vol. 15(2), pages 127-42.
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