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Menu Costs, Trade Flows, and Exchange Rate Volatility

Listed author(s):
  • Logan Lewis

    (Federal Reserve Board)

U.S. imports and exports respond little to exchange rate changes in the short run. Pricing behavior has long been thought central to explaining this response: if local prices do not respond to exchange rates, neither will trade flows. Sticky prices and strategic complementarities in price setting generate sluggish responses, and they are necessary to match newly available international micro price data. I test models capable of replicating price data against trade flows. Even with significant short-run frictions, the models still imply a trade response to exchange rates stronger than found in the data. Moreover, using significant cross-sector heterogeneity, comparative statics implied by the model find little to no support in the data. These results suggest that while complementarity in price setting and sticky prices can explain pricing patterns, some other short-run friction is needed to match actual trade flows. Furthermore, the muted response found for sectors with high long-run substitutability implies that simply assuming low elasticities may be inappropriate. Finally, there is evidence of an asymmetric response to exchange rate changes.

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File URL: https://economicdynamics.org/meetpapers/2013/paper_313.pdf
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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 313.

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Date of creation: 2013
Handle: RePEc:red:sed013:313
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  1. Stephen Davis & John Haltiwanger & Ron Jarmin & Javier Miranda, 2006. "Volatility and Dispersion in Business Growth Rates: Publicly Traded Versus Privately Held Firms," Working Papers 06-17, Center for Economic Studies, U.S. Census Bureau.
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  19. Landry, Anthony, 2010. "State-dependent pricing, local-currency pricing, and exchange rate pass-through," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 1859-1871, October.
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