Exchange Rate Pass-Through in a Competitive Model of Pricing-to-Market

This paper extends the Mussa and Rosen (1978) model of quality pricing under perfect competition. Exporters sell goods of different qualities to consumers who have heterogeneous preferences for quality. Production is subject to decreasing returns to scale and, therefore, supply and the toughness of...

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Bibliographic Details
Published inJournal of money, credit and banking Vol. 41; no. s1; pp. 151 - 175
Main Authors AUER, RAPHAEL, CHANEY, THOMAS
Format Journal Article
LanguageEnglish
Published Malden, USA Blackwell Publishing Inc 01.02.2009
Wiley Subscription Services
John Wiley & Sons, Inc
Ohio State University Press
Wiley
Subjects
Appreciation
Coefficients
Consumer equilibrium
Consumer goods
Consumer prices
Consumers
Economic models
Economics and Finance
exchange rate pass-through
Exchange rates
Exporters
Exports
F11
F14
Forecasts and trends
Foreign exchange
Foreign exchange rates
Humanities and Social Sciences
L11
L16
Marginal costs
Market trend/market analysis
Monetary economics
Monetary models
Monetary theory
Monopolistic competition
Perfect competition
Price shocks
Prices
Prices and rates
Pricing
pricing-to-market model
Product price
Retail prices
Studies
Transmission mechanism
US imports
United States
United States > US
Exchange rate pass-through
Pricing-to-market model
Online AccessGet full text
ISSN0022-2879
1538-4616
DOI10.1111/j.1538-4616.2008.00202.x

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Summary:This paper extends the Mussa and Rosen (1978) model of quality pricing under perfect competition. Exporters sell goods of different qualities to consumers who have heterogeneous preferences for quality. Production is subject to decreasing returns to scale and, therefore, supply and the toughness of competition react to cost changes brought about by exchange rate fluctuations. First, we predict that exchange rate shocks are imperfectly passed through into prices. Second, prices of low-quality goods are more sensitive to exchange rate shocks than prices of high-quality goods. Third, in response to an exchange rate appreciation, the composition of exports shifts toward higher quality and more expensive goods. We test these predictions using highly disaggregated price and quantity U.S. import data and find only weak empirical evidence in support of our theory.
Bibliography:ark:/67375/WNG-S1MB8GL9-T
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ArticleID:JMCB202
We are indebted to Daron Acemoglu, Philippe Bacchetta, Rich Clarida, Giancarlo Corsetti, Michael Devreux, Ron Findlay, Xavier Gabaix, Gita Gopinath, James Harrigan, Guido Lorenzoni, Eric Verhoogen, David Weinstein, seminar participants at UBC Vancouver, Columbia University, Dartmouth College, the European University Institute, the Federal Reserve Board, Gerzensee, the NBER Winter ITI Meeting, UT Austin, and the University of Zurich, two anonymous referees, and the editor, Ken West, for helpful comments and discussions. We are grateful to Ferdinando Monte for his invaluable research assistance. The views expressed in this paper do not necessarily represent those of the Swiss National Bank.
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ISSN:0022-2879
1538-4616
DOI:10.1111/j.1538-4616.2008.00202.x