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Currency Choice and Exchange Rate Pass-Through

  • Gita Gopinath
  • Oleg Itskhoki
  • Roberto Rigobon

We show, using novel data on currency and prices for US imports, that even conditional on a price change, there is a large difference in the exchange rate pass-through of the average good priced in dollars (25 percent) versus nondollars (95 percent). We document this to be the case across countries and within disaggregated sectors. This finding contradicts the assumption in an important class of models that the currency of pricing is exogenous. We present a model of endogenous currency choice in a dynamic price setting environment and show that the predictions of the model are strongly supported by the data. (JEL E31, F14, F31)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.100.1.304
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File URL: http://www.aeaweb.org/aer/data/mar2010/20071160_data.zip
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 100 (2010)
Issue (Month): 1 (March)
Pages: 304-36

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Handle: RePEc:aea:aecrev:v:100:y:2010:i:1:p:304-36
Note: DOI: 10.1257/aer.100.1.304
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  18. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
  19. Philippe Bacchetta & Eric van Wincoop, 2002. "Why Do Consumer Prices React less than Import Prices to Exchange Rates?," NBER Working Papers 9352, National Bureau of Economic Research, Inc.
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