Why do Consumer Prices React Less than Import Prices to Exchange Rates
By Philippe Bacchetta, Eric van Wincoop. 2002
177 citations recorded by the source corpus.
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.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/e6a88c856c9a3ec94c4e599557db5612e40e7d23
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Citations in the corpus
- Exchange Rate Pass-Through in Emerging Markets (2007, unknown): “Devereux and Engel (2001) and Bacchetta and van Wincoop (2003) explore instead the role of local currency pricing in reducing the degree of ERPT.”
- Exchange-Rate Pass-Through in the G-7 Countries (2006, unknown): “Two papers cited frequently are Devereux and Engel (2001) and Bacchetta and vanWincoop (2003). The novelty of their papers is that they endogenize a firm’s choice of invoicing currency and argue that countries with low relative exchange rate variability or stable monetary policies are more likely to”
- DECLINING EXCHANGE RATE PASS-THROUGH TO U.S. IMPORT PRICES: THE POTENTIAL ROLE OF GLOBAL FACTORS (2007, background): “Devereux and Engel (2001) and Bacchetta and van Wincoop (2003), two key papers in this literature, endogenize a firm’s choice of invoicing currency and then show that countries with low exchange rate variability or stable monetary policies are more likely to have their currencies chosen for transact”