English, Article, Journal or magazine article edition: Trade Integration, Competiton, and the Decline in Exchange-rate Pass-through Christopher Gust; Sylvain Leduc; Robert Vigfusson

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Bookmark: http://trove.nla.gov.au/version/30159
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Trade Integration, Competiton, and the Decline in Exchange-rate Pass-through
Author
  • Christopher Gust
  • Sylvain Leduc
  • Robert Vigfusson
Physical Description
  • preprint
Notes
  • 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.
  • Pass-through, Trade Integration, Strategic Complementarities
  • RePEc:red:sed006:165
Language
  • English
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