Prices and Exchange Rates: A Theory of Disconnection

Jose Antonio Rodriguez Lopez ()

No 80902, Working Papers from University of California-Irvine, Department of Economics

Abstract: I present partial and general equilibrium versions of a sticky-wage model of exchange rate pass-through with heterogeneous producers and endogenous markups. The model's results are consistent with a story of substantial expenditure-switching effects of exchange rate changes in the presence of low levels of exchange rate pass-through to firm-level and aggregate import prices. After an exchange rate shock, aggregate import prices are subject to a survivorship bias due to changes in the extensive margin of trade. At the firm level, each producer adjusts its markups depending on its own productivity and the change in the competition environment generated by the exchange rate movement. Firm-level price responses are asymmetric -- different for appreciations and depreciations -- and adjustments in the intensive margin of trade are substantial. The general equilibrium model, solved with a second-order solution method, preserves the partial equilibrium results and shows how firm relocations increase the persistence of exogenous shocks.

Keywords: Exchange rate pass-through; Heterogeneous firms; Endogenous markups (search for similar items in EconPapers)
JEL-codes: F12 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-opm
Date: 2008-07
View list of references View citations in EconPapers

Downloads: (external link)
http://www.economics.uci.edu/docs/2008-09/lopez-02.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:irv:wpaper:080902

Access Statistics for this paper

More papers in Working Papers from University of California-Irvine, Department of Economics
Contact information at EDIRC.
Series data maintained by Vanessa Roche ().