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Firm-to-Firm Relationships and the Pass-Through of Shocks: Theory and Evidence

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Abstract

Economists have long suspected that firm-to-firm relationships might lower the responsiveness of prices to shocks due to the use of fixed-price contracts. Using transaction-level U.S. import data, I show that the pass-through of exchange rate shocks in fact rises as a relationship grows older. Based on novel stylized facts about a relationship?s life cycle, I develop a model of relationship dynamics in which a buyer-seller pair accumulates relationship capital to lower production costs under limited commitment. The structurally estimated model generates countercyclical markups and countercyclical pass-through of shocks through variation in the economy?s rate of relationship creation, which falls in recessions.

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  • Sebastian Heise, 2019. "Firm-to-Firm Relationships and the Pass-Through of Shocks: Theory and Evidence," Staff Reports 896, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:896
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    Cited by:

    1. Zheng Wang, 2021. "Blame the Foreigners? Exports and Sulfur Dioxide Emissions in China," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 80(2), pages 279-309, October.
    2. Abbritti, Mirko & Aguilera-Bravo, Asier & Trani, Tommaso, 2021. "Long-term business relationships, bargaining and monetary policy," Economic Modelling, Elsevier, vol. 101(C).
    3. Michael Devereux & Wei Dong & Ben Tomlin, 2019. "Trade Flows and Exchange Rates: Importers, Exporters and Products," Staff Working Papers 19-41, Bank of Canada.
    4. Cédric Duprez & Glenn Magerman, 2019. "Price Updating with Production Networks," Working Papers ECARES 2019-07, ULB -- Universite Libre de Bruxelles.
    5. Mary Amiti & Sebastian Heise, 2021. "U.S. Market Concentration and Import Competition," Staff Reports 968, Federal Reserve Bank of New York.
    6. Cedric Duprez & Glenn Magerman, 2018. "Price Updating in Production Networks," Working Paper Research 352, National Bank of Belgium.

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    More about this item

    Keywords

    prices; trade relationships; supply chain; exchange rate;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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