Firms’ Heterogeneity and Incomplete Pass-Through

Stefania Garetto

No WP2014-006, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: A large body of empirical work documents that prices of traded goods change by a smaller proportion than real exchange rates between the trading countries (incomplete pass-through). The wedge between exchange rates and relative prices also varies a cross countries (pricing-to-market). I present a model of trade and international price-setting with heterogeneous firms, where firms’ strategic behavior implies that: 1) firm-level pass-through is incomplete and a U-shaped function of firm market share; 2) exchange rate fluctuations affect both the prices of traded goods and the prices of goods sold domestically; and 3) firm-level pass-through varies across destination countries. Estimates from a panel data set of cars prices support the predictions of the model.

Keywords: Heterogeneous firms; incomplete pass-through; pricing to market (search for similar items in EconPapers)
JEL-codes: F12 F31 L13 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2014-03
New Economics Papers: this item is included in nep-bec, nep-com, nep-int and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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