This paper was prepared for the conference on Domestic Prices in an Integrated World Economy, hosted by the Board of Governors of the Federal Reserve System, Washington, DC, September 27–28, 2007. We thank Colin Cameron, Linda Goldberg, Oscar Jorda, Steve Kamin, Guido Kursteiner, and Robert Vigfusson for helpful comments. We also thank Benjamin Mandel for superb research assistance.
Pass-Through of Exchange Rates and Competition between Floaters and Fixers
Article first published online: 22 JAN 2009
© 2009 The Ohio State University
Journal of Money, Credit and Banking
Volume 41, Issue Supplement s1, pages 35–70, February 2009
How to Cite
BERGIN, P. R. and FEENSTRA, R. C. (2009), Pass-Through of Exchange Rates and Competition between Floaters and Fixers. Journal of Money, Credit and Banking, 41: 35–70. doi: 10.1111/j.1538-4616.2008.00198.x
- Issue published online: 22 JAN 2009
- Article first published online: 22 JAN 2009
- Received October 30, 2007; and accepted in revised form September 3, 2008.
- exchange rates;
This paper studies how a rise in the share of U.S. imports from China, or any country with a fixed exchange rate, can explain a disproportionate fall in exchange rate pass-through to U.S. import prices. A theoretical model provides an explanation working through changes in markups, showing that a particular “local bias” condition is necessary and that free entry amplifies the effect. The model produces a structural equation for pass-through regressions including the China share; panel regressions over 1993–2006 indicate that the rising share of trade from China or other exchange rate fixers can explain as much as one-half of the observed decline in pass-through for the United States.