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Exchange Rate Pass-Through When Market Share Matters

  • Froot, Kenneth A
  • Klemperer, Paul D

The authors investigate the pass-through from exchange rates to import prices when firms' future demands depend on their current market shares. They show that profit-maximizing foreign firms may either raise or lower their dollar export prices when the dollar appreciates temporarily (i.e., the pass-through may be perverse) and that current import prices may be more sensitive to expected future exchange rates than to current exchange rates. They present evidence that suggests the behavior of expected future exchange rates may provide a clue to the puzzling recent behavior of U.S. import prices. Copyright 1989 by American Economic Association.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 79 (1989)
Issue (Month): 4 (September)
Pages: 637-54

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Handle: RePEc:aea:aecrev:v:79:y:1989:i:4:p:637-54
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  1. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-53, March.
  2. Meese, Richard A & Rogoff, Kenneth, 1988. " Was It Real? The Exchange Rate-Interest Differential Relation over the Modern Floating-Rate Period," Journal of Finance, American Finance Association, vol. 43(4), pages 933-48, September.
  3. Farrell, Joseph & Shapiro, Carl, 1986. "Dynamic Competition with Lock-In," Department of Economics, Working Paper Series qt1d43h5sq, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. repec:oup:qjecon:v:104:y:1989:i:4:p:635-54 is not listed on IDEAS
  5. Paul R. Krugman & Richard E. Baldwin, 1987. "The Persistence of the U.S. Trade Deficit," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(1), pages 1-56.
  6. Arthur M. Okun, 1975. "Inflation: Its Mechanics and Welfare Costs," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 351-402.
  7. Barsky, Robert B & Summers, Lawrence H, 1988. "Gibson's Paradox and the Gold Standard," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 528-50, June.
  8. J.-P. Fitoussi & E. S. Phelps, 1986. "Causes of the 1980s Slump in Europe," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 487-520.
  9. Jeffrey A. Frankel & Kenneth A. Froot, 1985. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
  10. Baldwin, Richard, 1990. "Hysteresis in Trade," Empirical Economics, Springer, vol. 15(2), pages 127-42.
  11. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
  12. repec:adr:anecst:y:1986:i:3:p:04 is not listed on IDEAS
  13. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
  14. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
  15. repec:oup:qjecon:v:102:y:1987:i:2:p:375-94 is not listed on IDEAS
  16. Catherine L. Mann, 1986. "Prices, profit margins, and exchange rates," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jun, pages 366-379.
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