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Firm-to-Firm Relationships and the Pass-Through of Shocks: Theory and Evidence

Sebastian Heise ()

No 896, Staff Reports from Federal Reserve Bank of New York

Abstract: Economists have long suspected that firm-to-firm relationships might lower the responsiveness of prices to shocks due to the use of fixed-price contracts. Using transaction-level U.S. import data, I show that the pass-through of exchange rate shocks in fact rises as a relationship grows older. Based on novel stylized facts about a relationship?s life cycle, I develop a model of relationship dynamics in which a buyer-seller pair accumulates relationship capital to lower production costs under limited commitment. The structurally estimated model generates countercyclical markups and countercyclical pass-through of shocks through variation in the economy?s rate of relationship creation, which falls in recessions.

Keywords: prices; trade relationships; supply chain; exchange rate (search for similar items in EconPapers)
JEL-codes: F14 E32 L14 E30 (search for similar items in EconPapers)
Pages: 90 pages
Date: 2019-08-01
New Economics Papers: this item is included in nep-com, nep-mac and nep-opm
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