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A Decomposition of the Sources of Incomplete Cross-Border Transmission

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  • Rebecca Hellerstein

    ()
    (International Research Federal Reserve Bank of New York)

Abstract

Despite its importance, the microeconomics of the international transmission of shocks is not well understood. The conventional wisdom is that relative price changes are the primary mechanism by which shocks are transmitted across borders. Yet traded-goods prices exhibit significant inertia in the face of shocks such as exchange rate changes. This paper uses a structural model to quantify the relative importance of manufacturers' and retailers' local-cost components and markup adjustments as sources of this incomplete transmission. The model is applied to a panel dataset of one industry with retail and wholesale prices for UPC (Universal Product Code)-level products. Markup adjustments by manufacturers and the retailer explain two-thirds of the incomplete transmission, and local-cost components account for the remaining one-third. Foreign manufacturers generally bear more of the cost (or reap more of the benefit) of an exchange-rate-induced marginal cost shock than do domestic consumers, domestic manufacturers, or the domestic retailer.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 805.

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Date of creation: 2005
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Handle: RePEc:red:sed005:805

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Keywords: cross-border transmission: international price discrimination;

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Cited by:
  1. Villas-Boas, Sofia & Hellerstein, Rebecca, 2006. "Identification of supply models of retailer and manufacturer oligopoly pricing," Economics Letters, Elsevier, vol. 90(1), pages 132-140, January.
  2. Andrew Atkeson & Ariel Burstein, 2008. "Pricing-to-Market, Trade Costs, and International Relative Prices," American Economic Review, American Economic Association, vol. 98(5), pages 1998-2031, December.
  3. Pinelopi Koujianou Goldberg & Rebecca Hellerstein, 2008. "A Framework for Identifying the Sources of Local-Currency Price Stability with an Empirical Application," Working Papers 1161, Princeton University, Department of Economics, Center for Economic Policy Studies..
  4. Kólver Hernández & Asli Leblebicioglu, 2008. "A Regime Switching Analysis of Exchange Rate Pass-through," Working Papers 08-17, University of Delaware, Department of Economics.
  5. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2007. "Optimal Monetary Policy and the Sources of Local-Currency Price Stability," RSCAS Working Papers 2007/26, European University Institute.
  6. Rebecca Hellerstein & Sofia Berto Villas-Boas, 2006. "Arm's-length transactions as a source of incomplete cross-border transmission: the case of autos," Staff Reports 251, Federal Reserve Bank of New York.
  7. Emi Nakamura & Dawit Zerom, 2009. "Accounting for Incomplete Pass-Through," NBER Working Papers 15255, National Bureau of Economic Research, Inc.

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