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Cost Pass Through in a Competitive Model of Pricing-to-Market

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  • Raphael Anton Auer
  • Thomas Chaney

Abstract

This paper builds up an extension to the Mussa and Rosen (1978) model of quality pricing under perfect competition. Our model incorporates decreasing returns to scale. First, we predict that exchange rate shocks are imperfectly passed through into prices. Second, prices of low quality goods are more sensitive to exchange rate shocks than prices of high quality goods. Third, in response to an exchange rate appreciation, the composition of exports shifts towards higher quality and more expensive goods. We test those predictions using highly disaggregated price and quantity US import data. We find that the prices of high quality goods, proxied as high unit price goods, are more sensitive to exchange rate movements. Moreover, we find evidence that in response to an exchange rate appreciation, the composition of exports shifts towards high unit price goods.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2008-06.

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Length: 42 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:snb:snbwpa:2008-06

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Related research

Keywords: Pricing-to-Market; Exchange Rate Pass Through; Local Distribution;

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References

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  1. Christopher Gust & Sylvain Leduc & Robert J. Vigfusson, 2006. "Trade integration, competition, and the decline in exchange-rate pass-through," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 864, Board of Governors of the Federal Reserve System (U.S.).
  2. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, Elsevier, vol. 40(3-5), pages 1007-1021, April.
  3. Xavier Gabaix & Augustin Landier, 2008. "Why Has CEO Pay Increased So Much?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(1), pages 49-100, 02.
  4. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2005. "DSGE models of high exchange-rate volatility and low pass-through," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 845, Board of Governors of the Federal Reserve System (U.S.).
  5. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
  6. Nocke, Volker & Yeaple, Stephen, 2007. "Cross-border mergers and acquisitions vs. greenfield foreign direct investment: The role of firm heterogeneity," Journal of International Economics, Elsevier, Elsevier, vol. 72(2), pages 336-365, July.
  7. Kleshchelski, Isaac & Vincent, Nicolas, 2009. "Market share and price rigidity," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(3), pages 344-352, April.
  8. Gita Gopinath & Oleg Itskhoki & Roberto Rigobon, 2010. "Currency Choice and Exchange Rate Pass-Through," American Economic Review, American Economic Association, American Economic Association, vol. 100(1), pages 304-36, March.
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Citations

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Cited by:
  1. Roberto Basile & Sergio de Nardis & Alessandro Girardi, 2009. "Pricing to market when quality matters," ISAE Working Papers, ISTAT - Italian National Institute of Statistics - (Rome, ITALY) 123, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
  2. 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.

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