Cost Pass Through in a Competitive Model of Pricing-to-Market

Raphael Auer () and Thomas Chaney ()

No 2008-6, Working Papers from Swiss National Bank

Abstract: This paper builds up an extension to the Mussa and Rosen (1978) model of quality pricing under perfect competition. Our model incorporates decreasing returns to scale. First, we predict that exchange rate shocks are imperfectly passed through into prices. Second, prices of low quality goods are more sensitive to exchange rate shocks than prices of high quality goods. Third, in response to an exchange rate appreciation, the composition of exports shifts towards higher quality and more expensive goods. We test those predictions using highly disaggregated price and quantity US import data. We find that the prices of high quality goods, proxied as high unit price goods, are more sensitive to exchange rate movements. Moreover, we find evidence that in response to an exchange rate appreciation, the composition of exports shifts towards high unit price goods.

Keywords: Pricing-to-Market; Exchange Rate Pass Through; Local Distribution (search for similar items in EconPapers)
JEL-codes: F11 F31 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-com, nep-ifn and nep-opm
Date: 2008-05-15

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Persistent link: http://EconPapers.repec.org/RePEc:ris:snbwpa:2008_006

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