Prices and Exchange Rates: A Theory of Disconnect

Jose Antonio Rodriguez Lopez ()
Additional contact information
Jose Antonio Rodriguez Lopez: Department of Economics, University of California-Irvine
Authors registered in the RePEc Author Service: Antonio Rodriguez-Lopez ()

No 80902, Working Papers from University of California-Irvine, Department of Economics

Abstract: I present a sticky-wage model of exchange rate pass-through with heterogeneous producers and endogenous markups. The model shows that low levels of exchange rate pass-through to firm- and aggregate-level import prices coexist with large in trade flows. After an exchange rate shock, aggregate import prices are subject to a composition bias due to changes in the extensive margin of trade (the number of goods traded between countries). At the firm level, each producer adjusts its markups depending on its own productivity and the change in the competitive environment generated by the exchange rate movement. Firm-level price responses are asymmetric---different for appreciations and depreciations---and adjustments in the intensive margin of trade (firm-level exports) are substantial. In general equilibrium, the model shows that firm reallocations increase the persistence exogenous shocks.

Keywords: Exchange rate pass-through; Expenditure switching regime; Heterogenous firms; Endogenous markups (search for similar items in EconPapers)
JEL-codes: F12 F41 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2008-07, Revised 2010-09
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
https://www.economics.uci.edu/files/docs/workingpapers/2008-09/lopez-02.pdf (application/pdf)

Related works:
Journal Article: Prices and Exchange Rates: A Theory of Disconnect (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:irv:wpaper:080902

Access Statistics for this paper

More papers in Working Papers from University of California-Irvine, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Melissa Valdez ().