Exchange Rate Pass-Through When Market Share Matters

Kenneth Froot and Paul Klemperer

American Economic Review, 1989, vol. 79, issue 4, 637-54

Abstract: The authors investigate the pass-through from exchange rates to import prices when firms' future demands depend on their current market shares. They show that profit-maximizing foreign firms may either raise or lower their dollar export prices when the dollar appreciates temporarily (i.e., the pass-through may be perverse) and that current import prices may be more sensitive to expected future exchange rates than to current exchange rates. They present evidence that suggests the behavior of expected future exchange rates may provide a clue to the puzzling recent behavior of U.S. import prices. Copyright 1989 by American Economic Association.

Date: 1989
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