Price Commitment vs. Flexibility: The Role of Exchange Rate Uncertainty and Its Implications for Exchange Rate Pass-Through

Byoung-Ky Chang and Harvey Lapan

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: This paper investigates the incentives to commit price or retain price flexibility in a model in which exporting firms face different degrees of exchange rate uncertainty. The result shows that introducing exchange rate uncertainty can lead to the endogenous emergence of an unique leader-follower equilibrium; which firm emerges as price leader depends on the substitutability of products, the magnitude of exchange rate uncertainty and the cost structure. Our study may provide one explanation as to why some exporters set price before the realization of the nominal exchange rates (ﾓsticky priceﾔ). The results imply exchange rate variability affects exchange rate pass-through.

Date: 2003-09-01
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Published in Review of International Economics, September 2003, vol. 11 no. 4, pp. 679-711

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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:5252

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