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Pass-through of exchange rates and purchasing power parity

  • Feenstra, Robert C.
  • Kendall, Jon D.

In this paper we develop and test two hypotheses about purchasing power parity (PPP) derived from the pricing behavior of profit- maximizing, exporting firms. The first is that changes in the price of traded goods relative to domestic substitutes, due to partial pass- through of exchange rates, will affect the PPP relation. The second is that PPP should hold on forward rather than spot exchange rates, due to hedging by firms. Using quarterly data for the United States, Canada, France, Germany, Japan and the United Kingdom, we find considerable support for the first but not the second hypothesis.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 43 (1997)
Issue (Month): 1-2 (August)
Pages: 237-261

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Handle: RePEc:eee:inecon:v:43:y:1997:i:1-2:p:237-261
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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