Trade Integration, Competiton, and the Decline in Exchange-rate Pass-through

Christopher Gust, Sylvain Leduc and Robert Vigfusson

No 165, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: Over the past twenty years, U.S. import prices have become less responsive to the exchange rate. We propose that this decline is a result of increased trade integration. To illustrate this effect, we develop an open economy DGE model in which there is strategic complementarity in price setting so that a firm's pricing decision depends on the prices set by its competitors. Because of the complementarity in price setting, a foreign exporter finds it optimal to vary its markup over cost in response to shocks that change the exchange rate, which insulates import prices from exchange rate movements. With increased trade integration, exporters have become more responsive to the prices of their competitors and this change in pricing behavior accounts for a significant portion of the observed decline in the sensitivity of U.S import prices to the exchange rate. Our environment of low pass-through also has important implications for the welfare benefits of trade integration: we find that the benefits are substantially reduced compared to an environment with complete pass-through.

Keywords: Pass-through; Trade Integration; Strategic Complementarities (search for similar items in EconPapers)
JEL-codes: F15 F41 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-ifn and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://www.red-files-public.s3.amazonaws.com/meetpapers/2006/paper_165.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Journal Article: Trade integration, competition, and the decline in exchange-rate pass-through (2010)
Working Paper: Trade integration, competition, and the decline in exchange-rate pass-through (2006)
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:red:sed006:165

Access Statistics for this paper

More papers in 2006 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().