Exchange-rate fluctuations and pass-through
AbstractIt is well known that prices respond only partially, if at all, to changes in the nominal exchange rate. Exchange-rate pass-through, quite low for consumer prices, is far for complete for international prices as well (see the survey in Goldberg and Knetter ). To the extent that incomplete exchange rate pass-through is due to destination specific markup adustment by firms, this is evidence of price discrimination. In turn, price discrimination implies that high exchange rate volatility will drive systematically apart cross-borders prices of otherwise identical goods. This paper develops a quantitative, dynamic open-economy model of endogenous incomplete pass-through and price discrimination. Building on Corsetti and Dedola , upstream firms with monopoly power optimally charge different prices to competitive retailers situated in different locations. What makes the elasticity of demand differ across marekts is the requirement for local-input-intensive distribution services. Therefore, deviations from the law of one price for both wholesale and retail prices derive endogenously from optimal pricing by monopolistic firms. Moreover, exchange-rate pass-through is incomplete -- its degree depending on the type and persistence of the shocks hitting the economy. This makes an assessment of the general equilibrium movements in consumer prices associated with exchange-rate fluctuations by no means trivial. Therefore, we calibrate our model to U.S. and European data and use it to quantify the general equilibrium effects of the differential impact of real and monetary shocks on exchange rates and prices. We also evaluate the distinctive role of wages and price rigidities in allowing the model to match the data. This is important because we can distinguish the contribution to a low degree of pass-through stemming from the endogenous price discrimination channel on the one hand, and that arising as an implication of price rigidities, under the assumption that foreign exporters face frictions in adjusting prices in local currencies
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 495.
Date of creation: 2004
Date of revision:
Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
exchange-rate pass-through; deviations from the law of one price; international transmission; distribution services;
Find related papers by JEL classification:
- F3 - International Economics - - International Finance
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Anna Laura Baraldi & Christian Rojas, 2011. "Cost Pass-Through with Network Externalities," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 10(3), pages 177-199, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).
If references are entirely missing, you can add them using this form.