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Exchange Rates and Prices

  • Rudiger Dornbusch

The appreciation of the U.S. dollar over the past five years opens important areas of research. The fact of a large and persistent real appreciation poses a challenge for equilibrium theorists to uncover the change in fundamentals and seems to support the role of long-term wage contracts in macroeconomic adjustment. This paper adopts the perspective of given wages and investigates in a partial equilibrium setting the determinants of relative price changes of different groups of goods. Specifically it advances hypotheses about those sectors where an exchange rate change should lead to large relative price changes and others where the relative price effects should be negligible.The general idea is to draw an models of industrial organization to explain price adjustments in terms of the degree of market concentration, the extent of product homogeneity and substitutability, and the relative market shares of domestic and foreign firms. The exchange rate movement and the less than fully flexible money wage interact to produce a cost shock for some firms in an industry -- foreign firms in the home market and home firms abroad -- and thus bring about the need for an industry-wide adjustment in prices.

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File URL: http://www.nber.org/papers/w1769.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1769.

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Date of creation: Dec 1985
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Publication status: published as Dornbusch, Rudiger. "Exchange Rates and Prices," American Economic Review, Vol. 77, No. 1, (March 1987), pp. 93-106.
Handle: RePEc:nbr:nberwo:1769
Note: ITI IFM
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  1. Rudiger Dornbusch, 1982. "Flexible Exchange Rates and Interdependence," NBER Working Papers 1035, National Bureau of Economic Research, Inc.
  2. Joshua Aizenman, 1984. "Testing Deviations From Purchasing Power Parity (PPP)," NBER Working Papers 1475, National Bureau of Economic Research, Inc.
  3. Jeffrey Sachs, 1985. "The Dollar and the Policy Mix: 1985," NBER Working Papers 1636, National Bureau of Economic Research, Inc.
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