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Exchange Rates and Prices

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  • Dornbusch, Rudiger

Abstract

The adjustment of relative prices to exchange rate movements is explained in an industrial organization approach. Given labor costs in the respective currencies, exchange rate movements change costs for firms selling in the home market and thus disturb the industry equilibrium. The extent of absolute and relative price adjustment is shown to depend on market integration, product substitutability, the relative number of domestic and foreign firms, and the market structure. The impact of exchange rates on prices is illustrated in a variety of approaches including the Cournot, A. Dixit and J. Stiglitz_(1977), and S. Salop_(1979) models. Some empirical evidence is offered in support of the theory. Copyright 1987 by American Economic Association.

Suggested Citation

  • Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
  • Handle: RePEc:aea:aecrev:v:77:y:1987:i:1:p:93-106
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    1. Jeffrey Sachs, 1985. "The Dollar and the Policy Mix: 1985," NBER Working Papers 1636, National Bureau of Economic Research, Inc.
    2. Joshua Aizenman, 1984. "Testing Deviations From Purchasing Power Parity (PPP)," NBER Working Papers 1475, National Bureau of Economic Research, Inc.
    3. Rudiger Dornbusch, 1982. "Flexible Exchange Rates and Interdependence," NBER Working Papers 1035, National Bureau of Economic Research, Inc.
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