Trade Integration, Competition, and the Decline in Exchange-Rate Pass-Through

By Christopher J. Gust, S. Leduc, Robert J. Vigfusson. 2006

261 citations recorded by the source corpus.

Over the past twenty years, U.S. import prices have become less responsive to the exchange rate. We propose that this decline is a result of increased trade integration. To illustrate this effect, we develop an open economy DGE model in which there is strategic complementarity in price setting so that a firm's pricing decision depends on the prices set by its competitors. Because of the complementarity in price setting, a foreign exporter finds it optimal to vary its markup over cost in response to shocks that change the exchange rate, which insulates import prices from exchange rate movements. With increased trade integration, exporters have become more responsive to the prices of their competitors and this change in pricing behavior accounts for a significant portion of the observed decline in the sensitivity of U.S import prices to the exchange rate. Our environment of low pass-through also has important implications for the welfare benefits of trade integration: we find that the benefits are substantially reduced compared to an environment with complete pass-through.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/6058b3a10221bf28e7e1ef1ebd9f5c228fe8b6c2

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Citations in the corpus

Frequency of Price Adjustment and Pass-Through (2010, methodology): “…analyzes an environment with state-dependent pricing, but assumes constant mark-ups and complete pass-through; Atkeson and Burstein (2005) and Gust, Leduc, and Vigfusson (2006) consider an environment with variable mark-ups to examine exchange rate pass-through, but they assume flexible…”
Lost in Transit: Product Replacement Bias and Pricing to Market (2012, unknown): “1987; Goldberg and Verboven, 2001; Corsetti and Dedola, 2005; Atkeson and Burstein, 2008; Gust, Leduc and Vigfusson, 2006; Gopinath, Itskhoki and Rigobon, 2007).2 Matching the measured”
Fiscal Policy, the Real Exchange Rate and Traded Goods (2010, unknown): “The model of Gust et al. (2006) has exactly this insight, which is applied to an otherwise standard two-country model with the goal of generating incomplete pass-through of nominal exchange variations on prices.”
Exchange-Rate Pass-Through in the G-7 Countries (2006, unknown): “We finally note a recent paper by Gust, Leduc, & Vigfusson (2005) that proposes the”
International Prices and Exchange Rates (2013, unknown): “Simonovska (2010) and Gust et al. (2010). Arkolakis et al.”
DECLINING EXCHANGE RATE PASS-THROUGH TO U.S. IMPORT PRICES: THE POTENTIAL ROLE OF GLOBAL FACTORS (2007, background): “26See Gust, Leduc, and Vigfusson (2006).”
Pass-Through of Exchange Rates and Competition between Floaters and Fixers (2009, background): “Included in this group are Gust et al (2006), which propose that increased trade integration has made exports more responsive to the prices of their competitors.”