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Pass-Through of Exchange Rates and Competition between Floaters and Fixers

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  • PAUL R. BERGIN
  • ROBERT C. FEENSTRA

Abstract

This paper studies how a rise in the share of U.S. imports from China, or any country with a fixed exchange rate, can explain a disproportionate fall in exchange rate pass-through to U.S. import prices. A theoretical model provides an explanation working through changes in markups, showing that a particular "local bias" condition is necessary and that free entry amplifies the effect. The model produces a structural equation for pass-through regressions including the China share; panel regressions over 1993-2006 indicate that the rising share of trade from China or other exchange rate fixers can explain as much as one-half of the observed decline in pass-through for the United States. Copyright (c) 2009 The Ohio State University.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1538-4616.2008.00198.x
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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 41 (2009)
Issue (Month): s1 (02)
Pages: 35-70

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Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:s1:p:35-70
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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  1. Philippe BACCHETTA & Eric VAN WINCOOP, 1999. "Does Exchange Rate Stability Increase Trade and Welfare ?," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9917, Université de Lausanne, Faculté des HEC, DEEP.
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  13. Mario Marazzi & Nathan Sheets & Robert J. Vigfusson & Jon Faust & Joseph E. Gagnon & Jaime R. Marquez & Robert F. Martin & Trevor A. Reeve & John H. Rogers, 2005. "Exchange rate pass-through to U.S. import prices: some new evidence," International Finance Discussion Papers 833, Board of Governors of the Federal Reserve System (U.S.).
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  15. Jane E. Ihrig & Mario Marazzi & Alexander D. Rothenberg, 2006. "Exchange-rate pass-through in the G-7 countries," International Finance Discussion Papers 851, Board of Governors of the Federal Reserve System (U.S.).
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