Working Paper: NBER ID: w9352
Authors: Philippe Bacchetta; Eric van Wincoop
Abstract: It is well known that the extent of pass-through of exchange rate changes to consumer prices is much lower than to import prices. One explanation is local distribution costs. Here we consider an alternative, complementary, explanation based on the optimal pricing strategies of firms. We consider a model where foreign exporting firms sell intermediate goods to domestic firms. Domestic firms assemble the imported intermediate goods and sell final goods to consumers. When domestic firms face significant competition from other domestic final goods producing sectors (e.g., the non-traded goods sector) we show that they prefer to price in domestic currency, while exporting firms tend to price in the exporter's currency. In that case the pass-through to import prices is complete, while the pass-through to consumer prices is zero.
Keywords: No keywords provided
JEL Codes: F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pricing strategy of domestic firms (L11) | passthrough of exchange rate changes to consumer prices (F31) |
| pricing strategy of foreign exporting firms (F14) | passthrough of exchange rate changes to import prices (F31) |
| competition from nontraded goods sectors (L19) | pricing strategy of domestic firms (L11) |
| competition from nontraded goods sectors (L19) | passthrough of exchange rate changes to consumer prices (F31) |
| pricing strategy of domestic firms (L11) | passthrough of exchange rate changes to import prices (F31) |