Pricing to Market and the Real Exchange Rate

Hamid Faruqee

No 1995/012, IMF Working Papers from International Monetary Fund

Abstract: This paper investigates the consequences of pricing to market for exchange rate pass-through and real exchange rate dynamics across different patterns of trade under market segmentation. Under two-way, intraindustry trade--where home prices display greater linkage with those of foreign competitors--domestic and export prices exhibit lower pass-through and greater destination-specific adjustment compared to intersectoral trade. With both trade patterns, pricing-to-market behavior intensifies the degree of persistence in the real exchange rate under nominal rigidities, and allows monetary shocks to have permanent effects on relative prices when goods markets remain segmented.

Keywords: WP; nominal exchange rate; unit of account; foreign currency; market segmentation; relative-price effect; price linkage; price differential; destination price; adjustment cost; price rule; home price-setter; price inertia; goods price; home-currency price; Real exchange rates; Currencies; Export prices; Trade balance; Exchange rates (search for similar items in EconPapers)
Pages: 34
Date: 1995-01-01
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Citations: View citations in EconPapers (20)

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