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Pass-Through of Exchange Rates and Purchasing Power Parity

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  • Feenstra, R.C.
  • Kendall, J.D.

Abstract

In this paper we develop and test two hypotheses about purchasing power parity (PPP) derived from the pricing behavior of profit- maximizing, exporting firms. The first is that changes in the price of traded goods relative to domestic substitutes, due to partial pass- through of exchange rates, will affect the PPP relation. The second is that PPP should hold on forward rather than spot exchange rates, due to hedging by firms. Using quarterly data for the United States, Canada, France, Germany, Japan and the United Kingdom, we find considerable support for the first but not the second hypothesis.
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Suggested Citation

  • Feenstra, R.C. & Kendall, J.D., 1994. "Pass-Through of Exchange Rates and Purchasing Power Parity," Papers 1994-06, Tasmania - Department of Economics.
    • Handle: RePEc:fth:tasman:1994-06
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    References listed on IDEAS

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    Keywords

    pricing ; enterprises;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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