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Imperfect Exchange Rate Passthrough: Strategic Pricing and Menu Costs

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  • Atish Ghosh
  • Holger Wolf

Abstract

A large body of literature finds that exporters do not pass nominal exchange rate movements fully through to destination market prices over short time horizons. This imperfect passthrough has been widely attributed to strategic “pricing-to-market”, whereby exporters deliberately accept changes in the home currency value of export prices in order to gain or defend market share. We show that imperfect passthrough in the short run may also arise from simple menu costs. In contrast to strategic pricing, however, the long run passthrough is complete under menu costs — with associated implications for trade adjustment. Examining the cover prices of two magazines, The Economist and Business Week, we find support for menu costs as a partial explanation of imperfect passthrough.

Suggested Citation

  • Atish Ghosh & Holger Wolf, 2001. "Imperfect Exchange Rate Passthrough: Strategic Pricing and Menu Costs," CESifo Working Paper Series 436, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_436
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    References listed on IDEAS

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    Cited by:

    1. Nooman Rebei & Steven Ambler & Ali Dib, 2004. "Optimal Taylor Rules in an Estimated Model of a Small Open Economy," Econometric Society 2004 North American Summer Meetings 627, Econometric Society.
    2. Smets, Frank & Wouters, Raf, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 947-981, July.
    3. Steve Ambler & Ali Dib & Nooman Rebei, 2003. "Nominal Rigidities and Exchange Rate Pass-Through in a Structural Model of a Small Open Economy," Staff Working Papers 03-29, Bank of Canada.
    4. Mirdala, Rajmund, 2015. "Exchange Rate Pass-Through in the Euro Area," MPRA Paper 68862, University Library of Munich, Germany.
    5. Patricia S. Pollard & Cletus C. Coughlin, 2004. "Size matters: asymmetric exchange rate pass-through at the industry level," Working Papers 2003-029, Federal Reserve Bank of St. Louis.
    6. Gregory Goering & Michael Pippenger, 2009. "Exchange Rates and Concurrent Leasing and Selling in Durable-Goods Monopoly," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 37(2), pages 187-196, June.
    7. Jiménez-Rodríguez, Rebeca & Morales-Zumaquero, Amalia, 2016. "A new look at exchange rate pass-through in the G-7 countries," Journal of Policy Modeling, Elsevier, vol. 38(5), pages 985-1000.
    8. Oral Williams & Olumuyiwa S Adedeji, 2004. "Inflation Dynamics in the Dominican Republic," IMF Working Papers 04/29, International Monetary Fund.
    9. Eva Ortega & Nooman Rebei, 2006. "The Welfare Implications of Inflation versus Price-Level Targeting in a Two-Sector, Small Open Economy," Staff Working Papers 06-12, Bank of Canada.

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