State dependent pricing, invoicing currency, and exchange rate pass-through

• Published in: Journal of international economics Vol. 70; no. 1; pp. 178 - 196
• Main Authors: Flodén, Martin, Wilander, Fredrik
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.09.2006; Elsevier; Elsevier Sequoia S.A
• Series: Journal of International Economics
• Subjects: Adjustment; Currencies; Currency; Exchange rate pass-through; Exchange rates; Foreign exchange rates; Imports; Innovations; Invoices; Invoicing; Invoicing currency; Nominal rigidities; Prices; Pricing; State; State dependent pricing; Studies; Volatility; Exchange rate pass-through; D40; E30; F40; F31; Invoicing currency; Nominal rigidities; State dependent pricing; Invoicing
• ISSN: 0022-1996; 1873-0353; 1873-0353
• DOI: 10.1016/j.jinteco.2005.08.002

We analyze exchange rate pass-through and volatility of import prices in a dynamic framework where firms are subject to menu costs and decide on price adjustments in response to exchange rate innovations. The exchange rate pass-through and import price volatility then depend on the invoicing currency in combination with functional forms of cost and demand functions. In particular, there is lower pass-through, less frequent price adjustments, and lower price volatility when prices are set in the importer's currency than when prices are set in the exporter's currency.