Does nominal rigidity mislead our perception of the exchange rate pass-through?

Olivier de Bandt and Tovonony Razafindrabe

No 2014-36, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: Relying on a novel dataset of detailed micro-data on import prices, this paper explores the close link that exists between nominal import price rigidity and the extent of exchange rate pass-through (ERPT). We show that previous evidence in favor of incomplete and low value of ERPT in the empirical literature may be explained by two factors: the relative importance of small variations in the exchange rate and, mainly, nominal rigidity. Once nominal rigidity is taken into account, we nd for French manufacturers that ERPT may be incomplete in the short run, but with relatively high value, and complete in the long run. In addition, assessing non-linearity and asymmetry issues, we provide evidence that the shape of the import price reaction function is distorted by the presence of nominal rigidity. Indeed, the linearity assumption is veri ed once nominal rigidity is taken into account. However, in the case where it is rejected, the import price reaction function is concave rather than convex, indicating that rms aim at protecting market shares. As a consequence, the common belief that "prices rise faster than they fall" is the results of nominal import price rigidity as far as ERPT is concerned.

Keywords: Exchange rate pass-through; nominal rigidity; import price. (search for similar items in EconPapers)
JEL-codes: C23 E31 F31 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2014
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
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Working Paper: Does nominal rigidity mislead our perception of the exchange rate pass-through? (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2014-36

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