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Price Commitment versus Flexibility: the Role of Exchange Rate Uncertainty and its Implications for Exchange Rate Passthrough

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  • Byoung‐Ky Chang
  • Harvey E. Lapan

Abstract

The paper investigates the incentives to commit price or retain price flexibility in a model in which exporting firms face different degrees of exchange rate uncertainty. The result shows that introducing exchange rate uncertainty can lead to the endogenous emergence of a unique leader–follower equilibrium; which firm emerges as price leader depends on the substitutability of products, the magnitude of exchange rate uncertainty, and the cost structure. This study may provide one explanation as to why some exporters set price before the realization of the nominal exchange rates (“sticky price”). The results imply exchange rate variability affects exchange rate passthrough.

Suggested Citation

  • Byoung‐Ky Chang & Harvey E. Lapan, 2003. "Price Commitment versus Flexibility: the Role of Exchange Rate Uncertainty and its Implications for Exchange Rate Passthrough," Review of International Economics, Wiley Blackwell, vol. 11(4), pages 697-711, September.
    • Handle: RePEc:bla:reviec:v:11:y:2003:i:4:p:697-711
    DOI: 10.1111/1467-9396.00412
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    Cited by:

    1. Andreas Bachmann, 2012. "Exchange rate pass-through to various price indices: empirical estimation using vector error correction models," Diskussionsschriften dp1205, Universitaet Bern, Departement Volkswirtschaft.
    2. Till Dannewald & Lutz Hildebrandt, 2008. "A Brand Specific Investigation of International Cost Shock Threats on Price and Margin with a Manufacturer-Wholesaler-Retailer Model," SFB 649 Discussion Papers SFB649DP2008-070, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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