Working Paper: NBER ID: w2542
Authors: Kenneth A. Froot; Paul Klemperer
Abstract: We investigate pricing to market when the exchange rate changes in cases where firms' future demands depend on their current market shares. We show that i) profit maximizing foreign firms may either raise or lower their domestic currency export prices when the domestic exchange rate appreciates temporarily (i.e. the "pass-through" from exchange rate changes to import prices may be perverse); ii) current import prices may be more sensitive to the expected future exchange rate than to the current exchange rate; iii) current import prices fall in response to an increase in uncertainty about the future exchange rate. We present evidence that suggests the behavior of expected future exchange rates may provide a clue to the puzzling behavior of U.S. import prices during the 1980s.
Keywords: exchange rate; passthrough; market share; pricing behavior
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Exchange rate changes (F31) | Current import prices (F14) |
| Expected future exchange rates (F31) | Current import prices (F14) |
| Uncertainty in future exchange rates (F31) | Current import prices (F14) |
| Exchange rate changes (F31) | Domestic currency export prices (F31) |
| Market share considerations (L17) | Pricing behavior (D40) |
| Future expectations (D84) | Pricing behavior (D40) |