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.
Exchange Rate Pass-Through in a Competitive Model of Pricing-to-Market
Article first published online: 22 JAN 2009
© 2009 The Ohio State University
Journal of Money, Credit and Banking
Volume 41, Issue Supplement s1, pages 151–175, February 2009
How to Cite
AUER, R. and CHANEY, T. (2009), Exchange Rate Pass-Through in a Competitive Model of Pricing-to-Market. Journal of Money, Credit and Banking, 41: 151–175. doi: 10.1111/j.1538-4616.2008.00202.x
- Issue published online: 22 JAN 2009
- Article first published online: 22 JAN 2009
- Received February 5, 2008; and accepted in revised form September 19, 2008.
- exchange rate pass-through;
- pricing-to-market model
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.