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The Response of Trade Prices to Exchange Rate Changes

  • Manuchehr Irandoust

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    The present paper examines export and import pricing behavior following exchange rate changes in small, open economies. Using a monopolistic model, this study reveals that export and import prices should change but not in proportion to exchange rate movements. The policy implication of the results is that the “pricing to market” phenomenon could be a critical factor in explaining the evolution of the external trade balance with strategic interaction present in the case of prices on tradable goods. Consequently, the use of an exchange rate policy in the case of external imbalances should be a central issue within the broader context of how market structure and conduct affect the optimal traded goods prices. Copyright Kluwer Academic Publishers 1999

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    File URL: http://hdl.handle.net/10.1023/A:1008372529231
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    Article provided by Springer in its journal Open Economies Review.

    Volume (Year): 10 (1999)
    Issue (Month): 4 (October)
    Pages: 355-363

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    Handle: RePEc:kap:openec:v:10:y:1999:i:4:p:355-363
    DOI: 10.1023/A:1008372529231
    Contact details of provider: Web page: http://www.springer.com

    Order Information: Web: http://www.springer.com/economics/international+economics/journal/11079/PS2

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    1. Kasa, Kenneth, 1992. "Adjustment costs and pricing-to-market theory and evidence," Journal of International Economics, Elsevier, vol. 32(1-2), pages 1-30, February.
    2. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
    3. Froot, Kenneth A & Klemperer, Paul D, 1989. "Exchange Rate Pass-Through When Market Share Matters," American Economic Review, American Economic Association, vol. 79(4), pages 637-54, September.
    4. Feenstra, Robert C. & Gagnon, Joseph E. & Knetter, Michael M., 1996. "Market share and exchange rate pass-through in world automobile trade," Journal of International Economics, Elsevier, vol. 40(1-2), pages 187-207, February.
    5. 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.
    6. Gagnon, Joseph E. & Knetter, Michael M., 1995. "Markup adjustment and exchange rate fluctuations: evidence from panel data on automobile exports," Journal of International Money and Finance, Elsevier, vol. 14(2), pages 289-310, April.
    7. 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.
    8. Richard Baldwin & Paul R. Krugman, 1986. "Persistent Trade Effects of Large Exchage Rate Shocks," NBER Working Papers 2017, National Bureau of Economic Research, Inc.
    9. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
    10. Marston, Richard C., 1990. "Pricing to market in Japanese manufacturing," Journal of International Economics, Elsevier, vol. 29(3-4), pages 217-236, November.
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