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A model of exchange rate pass-through

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  • Eric Fisher

Abstract

Exchange rate pass-through is the phenomenon whereby changes in the value of foreign exchange are reflected in changes in import prices. This paper presents a model in which firms are price setters who anticipate exchange rate changes. In equilibrium, firms' strategies incorporate expectations about the exchange rate consistently and are best responses to the strategies of all others in the world market. It is shown that exchange rate changes give rise to import price changes, but the degree of exchange rate pass-through depends upon domestic and foreign market structures and the exchange rate regime. In general, exchange rate pass-through is higher if the home market is monopolistic or if the foreign market is competitive. The paper concludes with an examination of disaggregated Japanese manufacturing price indices, and it shows that the degree of exchange rate pass-through was indeed correlated with industry concentration during the most recent period of the yen's depreciation against the dollar.

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  • Eric Fisher, 1987. "A model of exchange rate pass-through," International Finance Discussion Papers 302, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:302
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    References listed on IDEAS

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    Cited by:

    1. Eckart Jäger, 1999. "Exchange rates and bertrand oligopoly," Journal of Economics, Springer, vol. 70(3), pages 281-307, October.
    2. Goldberg, Linda S. & Tille, Cédric, 2008. "Vehicle currency use in international trade," Journal of International Economics, Elsevier, pages 177-192.
    3. Reginaldo P. Nogueira Jnr, 2006. "Inflation Targeting and the Role of Exchange Rate Pass-through," Studies in Economics 0602, School of Economics, University of Kent.
    4. Chang Byoung-Ky, 2001. "Exchange Rate Pass-Through in an International Duopoly model with Brand Loyalty," International Economic Journal, Taylor & Francis Journals, vol. 15(1), pages 41-59.
    5. Ahtiala, Pekka & Orgler, Yair E., 1995. "The optimal pricing of exports invoiced in different currencies," Journal of Banking & Finance, Elsevier, vol. 19(1), pages 61-77, April.
    6. Clostermann, Jörg, 1996. "The impact of the exchange rate on Germany's balance of trade," Discussion Paper Series 1: Economic Studies 1996,07e, Deutsche Bundesbank, Research Centre.
    7. Ilan Goldfajn & Sergio R.C. Werlang, 2000. "The pass-through from depreciation to inflation : a panel study," Textos para discussão 423, Department of Economics PUC-Rio (Brazil).
    8. 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.
    9. Stefania Garetto, 2014. "Firms’ Heterogeneity and Incomplete Pass-Through," Boston University - Department of Economics - Working Papers Series WP2014-006, Boston University - Department of Economics.
    10. Richard Damania, 1998. "The Scope for Exchange Rate Pass-through in an Oligopoly," School of Economics Working Papers 1998-07, University of Adelaide, School of Economics.
    11. Ayoub Yousefi, 2000. "Merchandise Trade Balances of Less Developed Countries and Exchange Rate of the U.S. Dollar: Cases of Iran, Venezuela & Saudi Arabia," Working Papers 00002, University of Waterloo, Department of Economics, revised Feb 2000.
    12. Hens, Thorsten & Jager, Eckart & Kirman, Alan & Phlips, Louis, 1999. "Exchange rates and oligopoly," European Economic Review, Elsevier, vol. 43(3), pages 621-648, March.
    13. Garetto, Stefania, 2016. "Firms' heterogeneity, incomplete information, and pass-through," Journal of International Economics, Elsevier, vol. 101(C), pages 168-179.
    14. Stefania Garetto, 2016. "Firms’ Heterogeneity, Incomplete Information, and Pass-Through," Boston University - Department of Economics - Working Papers Series wp2016-004, Boston University - Department of Economics.
    15. Clostermann, Jörg, 1996. "Der Einfluß des Wechselkurses auf die deutsche Handelsbilanz," Discussion Paper Series 1: Economic Studies 1996,07, Deutsche Bundesbank, Research Centre.
    16. Ivohasina F Razafimahefa, 2012. "Exchange Rate Pass-Through in Sub-Saharan African Economies and its Determinants," IMF Working Papers 12/141, International Monetary Fund.
    17. Reginaldo P. Nogueira Jnr, 2006. "Inflation Targeting, Exchange Rate Pass-Through and 'Fear of Floating'," Studies in Economics 0605, School of Economics, University of Kent.
    18. Michael Melvin & Jahangir Sultan, 1990. "The choice of an invoicing currency in international trade and the balance of trade impact of currency depreciation," Open Economies Review, Springer, vol. 1(3), pages 251-268, October.
    19. Friberg, Richard, 1996. "On the Role of Pricing Exports in a Third Currency," SSE/EFI Working Paper Series in Economics and Finance 128, Stockholm School of Economics.
    20. Chang, Byoung-Ky, 1999. "Three essays on imperfect competition and exchange rate pass-through in the presence of multiple exchange rates," ISU General Staff Papers 1999010108000013554, Iowa State University, Department of Economics.
    21. Enrique G. Mendoza & Linda L. Tesar, 1995. "Supply-Side Economics in a Global Economy," NBER Working Papers 5086, National Bureau of Economic Research, Inc.
    22. Webber, A., 1999. "Dynamic and Long Run Responses of Import Prices to the Exchange Rate in the Asia-Pacific," Economics Working Papers WP99-11, School of Economics, University of Wollongong, NSW, Australia.
    23. Cabral, Luis M. B. & Mello, Antonio S., 1997. "Exchange rate expectations and market shares," Economics Letters, Elsevier, vol. 55(1), pages 61-67, August.
    24. Thorsten Hens, 1997. "Exchange rates and perfect competition," Journal of Economics, Springer, vol. 65(2), pages 151-161, June.

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    Keywords

    Foreign exchange rates;

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