Working Paper: CEPR ID: DP15019
Authors: Reto Foellmi; Adrian Jäggi; Fabian Schnell
Abstract: How does the exchange rate affect the way that firms adjust their prices? We use quarterly firm andproduct price data, underlying the Swiss sectoral consumer price index. The data allows us to trace the pricing decisions of the identified firm over time and as a function of the distance to the border distance. The appreciation of the Swiss franc results in an increase in the probability of both positive and negative price changes. When a firm is more closely located to the border, the probability of a negative price change is higher. On the intensive margin, we document that an appreciation of the Swiss Franc leads to price reductions, and that this effect is stronger the closer a firm is located to the nearest border. However, for firms located far away from the border, an appreciation of the Swiss Franc leads to no price reductions or even increases. We rationalise this by the relative strengths of income and substitution effects. The substitution effect dominates for firms close to the border, while the income effect dominates for firms located further away from the border.
Keywords: price setting; behavior of firms; exchange rate; distance to border
JEL Codes: E30; E31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Appreciation of the Swiss franc (F31) | Increase in the probability of positive price changes (G17) |
| Appreciation of the Swiss franc (F31) | Increase in the probability of negative price changes (E31) |
| Distance to the border (F55) | Decrease in the size of price changes (E31) |
| Appreciation of the Swiss franc (F31) | No price reductions or increases for firms further from the border (L11) |
| Appreciation of the Swiss franc (F31) | Increase in prices for firms located further away from the border (L11) |
| Distance to the border (F55) | Increase in the probability of negative price changes (E31) |