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Who bears the cost of a change in the exchange rate? The case of imported beer

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  • Rebecca Hellerstein

Abstract

This paper quantifies the welfare effects of a change in the nominal exchange rate using the example of the beer market. I estimate a structural econometric model that makes it possible to compute manufacturers' and retailers' pass-through of a nominal exchange-rate change, without observing wholesale prices or firms' marginal costs. I conduct counterfactual experiments to quantify how the change affects domestic and foreign firms' profits and domestic consumer welfare. The counterfactual experiments show that foreign manufacturers bear more of the cost of an exchange-rate change than do domestic consumers, domestic manufacturers, or a domestic retailer. The model can be applied to other markets and can serve as a tool to assess the welfare effects of various exchange-rate policies.

Suggested Citation

  • Rebecca Hellerstein, 2004. "Who bears the cost of a change in the exchange rate? The case of imported beer," Staff Reports 179, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:179
    Note: For a published version of this report, Rebecca Hellerstein, "Who Bears the Cost of a Change in the Exchange Rate? Pass-through Accounting for the Case of Beer," Journal of International Economics 76, no. 1 (September 2008): 14-32.
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    Citations

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    Cited by:

    1. Stewart Ngandu, 2008. "Exchange Rates And Employment," South African Journal of Economics, Economic Society of South Africa, vol. 76(s2), pages 205-221, August.
    2. Céline Bonnet & Pierre Dubois, 2010. "Inference on vertical contracts between manufacturers and retailers allowing for nonlinear pricing and resale price maintenance," RAND Journal of Economics, RAND Corporation, vol. 41(1), pages 139-164, March.
    3. Villas-Boas, Sofia B., 2006. "Vertical relationships between manufacturers and retailers: inference with limited data," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt0z26d2v9, Department of Agricultural & Resource Economics, UC Berkeley.
    4. Tsui, Hsiao-Chien, 2008. "Exchange rate and pricing behavior: Comparison of Taiwan with Japan for manufacturing industries," Japan and the World Economy, Elsevier, vol. 20(2), pages 290-301, March.
    5. Sofia Berto Villas-Boas, 2007. "Vertical Relationships between Manufacturers and Retailers: Inference with Limited Data," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(2), pages 625-652.
    6. Campa, Jose M. & Goldberg, Linda S. & Gonzalez-Minguez, Jose M., 2005. "Exchange-rate pass-through to import prices in the euro area," IESE Research Papers D/609, IESE Business School.
    7. Linda S. Goldberg & Cédric Tille, 2006. "The internationalization of the dollar and trade balance adjustment," Staff Reports 255, Federal Reserve Bank of New York.
    8. Jaime R. Marquez & Charles P. Thomas, 2006. "Measurement matters for modeling U.S. import prices," International Finance Discussion Papers 883, Board of Governors of the Federal Reserve System (U.S.).
    9. Linda S. Goldberg & Cédric Tille, 2006. "The International Role of the Dollar and Trade Balance Adjustment," NBER Working Papers 12495, National Bureau of Economic Research, Inc.
    10. Goldberg, Linda S. & Campa, José Manuel, 2006. "Distribution Margins, Imported Inputs and the Insensitivity of the CPI to Exchange Rates," CEPR Discussion Papers 5650, C.E.P.R. Discussion Papers.
    11. Morten Overgaard Ravn & Stephanie Schmitt-Grohe & Martin Uribe, 2010. "Incomplete Cost Pass-Through Under Deep Habits," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 317-332, April.
    12. Jose Manuel Campa & Linda S. Goldberg, 2008. "Pass-Through of Exchange Rates to Consumption Prices: What Has Changed and Why?," NBER Chapters, in: International Financial Issues in the Pacific Rim: Global Imbalances, Financial Liberalization, and Exchange Rate Policy, pages 139-176, National Bureau of Economic Research, Inc.
    13. Pdf Strydom, 2006. "The International Adjustment Mechanism Under Restraint," South African Journal of Economics, Economic Society of South Africa, vol. 74(3), pages 463-472, September.
    14. Charles P. Thomas & Jaime Marquez, 2009. "Measurement matters for modelling US import prices This article is a U.S. Government work and is in the public domain in the U.S.A," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(2), pages 120-138.
    15. Craig R. Parsons & Kiyotaka Sato, 2006. "Exchange Rate Pass‐through and Currency Invoicing: Implications for Monetary Integration in East Asia," The World Economy, Wiley Blackwell, vol. 29(12), pages 1759-1788, December.
    16. Murshed, Hasan & Nakibullah, Ashraf, 2015. "Price level and inflation in the GCC countries," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 239-252.
    17. Otani, Akira & Shiratsuka, Shigenori & Shirota, Toyoichiro, 2003. "The Decline in the Exchange Rate Pass-Through: Evidence from Japanese Import Prices," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(3), pages 53-81, October.
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    More about this item

    Keywords

    beer; pricing-to-market; local-currency pricing; cross-border vertical contracts; law of one price; exchange-rate pass-through; market segmentation;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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