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Market Conduct, Price Interdependence and Exchange Rate Pass-Through

  • Sophocles N. Brissimis

    ()

    (Bank of Greece, Economic Research Department and University of Piraeus)

  • Theodora S. Kosma

    (Bank of Greece, Economic Research Department)

This paper develops an international oligopoly model where foreign and domestic firms simultaneously choose their pricing strategies under the assumption of non-zero conjectural variations. The model captures the links between domestic and foreign producers’ prices and establishes a relationship between the price of domestically produced goods and the exchange rate, which appears to be important for the determination of exchange rate pass-through. It is also found that the equilibrium pass-through elasticity can be less than, equal to or greater than one depending on exporting and domestic firms’ conjectural variations. The empirical implications of the model are tested with the Johansen multivariate cointegration technique using data for Japanese firms’ exports to the US market. The results indicate that US producer prices are indeed influenced by the prices of their Japanese competitors and that the pass-through elasticity is less than one.

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Paper provided by Bank of Greece in its series Working Papers with number 51.

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Length: 37 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:bog:wpaper:51
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