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Currency Choice and Exchange Rate Pass-Through

Listed author(s):
  • 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: 304-336

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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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References listed on IDEAS
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  1. Robert Lucas & Mike Golosov, 2004. "Menu Costs and Phillips Curves," 2004 Meeting Papers 144, Society for Economic Dynamics.
  2. Bacchetta, Philippe & van Wincoop, Eric, 2003. "Why do Consumer Prices React Less than Import Prices to Exchange Rates?," CEPR Discussion Papers 3702, C.E.P.R. Discussion Papers.
  3. Goldberg, Linda S. & Tille, Cédric, 2008. "Vehicle currency use in international trade," Journal of International Economics, Elsevier, vol. 76(2), pages 177-192, December.
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  5. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1241-1277, November.
  6. Basu, S., 1993. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," Papers 93-23, Michigan - Center for Research on Economic & Social Theory.
  7. Gita Gopinath & Oleg Itskhoki & Roberto Rigobon, 2007. "Currency Choice and Exchange Rate Pass-through," NBER Working Papers 13432, National Bureau of Economic Research, Inc.
  8. Michael B. Devereux & Charles Engel & Peter E. Storgaard, 2003. "Endogenous Exchange Rate Pass-through when Nominal Prices are Set in Advance," IEHAS Discussion Papers 0304, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  9. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
  10. Christian Broda & David E. Weinstein, 2004. "Globalization and the Gains from Variety," NBER Working Papers 10314, National Bureau of Economic Research, Inc.
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  12. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  13. Krugman, Paul, 1980. "Vehicle Currencies and the Structure of International Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(3), pages 513-526, August.
  14. Maurice Obstfeld & Kenneth Rogoff, 1994. "Exchange Rate Dynamics Redux," NBER Working Papers 4693, National Bureau of Economic Research, Inc.
  15. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 7-35, June.
  16. Devereux, Michael B. & Engel, Charles, 2007. "Expenditure switching versus real exchange rate stabilization: Competing objectives for exchange rate policy," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2346-2374, November.
  17. Friberg, Richard, 1998. "In which currency should exporters set their prices?," Journal of International Economics, Elsevier, vol. 45(1), pages 59-76, June.
  18. Ariel Burstein & Andrew Atkeson, 2005. "Trade Costs, Pricing to Market, and International Relative Prices," 2005 Meeting Papers 201, Society for Economic Dynamics.
  19. repec:rus:hseeco:122183 is not listed on IDEAS
  20. Charles Engel, 2005. "Equivalence Results for Optimal Pass-Through, Optimal Indexing to Exchange Rates, and Optimal Choice of Currency for Export Pricing," NBER Working Papers 11209, National Bureau of Economic Research, Inc.
  21. Gita Gopinath & Roberto Rigobon, 2008. "Sticky Borders," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 531-575.
  22. Jiawen Yang, 1992. "Exchange Rate Pass-Through in U.S. Manufacturing Industries," Working Papers 92-28, New York University, Leonard N. Stern School of Business, Department of Economics.
  23. José Manuel Campa & Linda S. Goldberg, 2005. "Exchange Rate Pass-Through into Import Prices," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 679-690, November.
  24. Peter J. Klenow & Jonathan L. Willis, 2006. "Real rigidities and nominal price changes," Research Working Paper RWP 06-03, Federal Reserve Bank of Kansas City.
  25. 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.
  26. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 655-690.
  27. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
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