Price and Consumption Responses to Large Exchange Rate Shocks: Evidence from Switzerland

Sarah Lein, Ariel Burstein and Raphael Auer
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Ariel Burstein: UCLA

No 1148, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: An estimate of how firms set their prices in the presence of real and nominal price rigidities, and, in turn, how consumers react to these prices ideally identifies a large exogenous shock. We use the large appreciation of the Swiss Franc during the period 2010 to 2016, including the narratively identified shocks induced by the removal of the lower bound on the CHF/EUR nominal exchange rate in January 2015 as a natural experiment. We document several empirical facts on the response of prices and quantities to these shocks. Using a multi-country homescan dataset, which includes purchase prices and quantities for more than 3,000 individual goods purchased both in Switzerland and in bordering countries, we find that i) import prices respond quickly, but pass through is incomplete, ii) domestically produced goods prices do not react within the first months after the appreciation, iii) the frequency of import price changes clearly responds to large exchange-rate movements, iv) the absolute average size of price changes declines markedly in the adjustment period, v) expenditure switching effects are small in the short run with quantities reacting with an elasticity below one. We document that a s,S pricing model with a mixture of leptokurtic and log-normal shocks can match these empirical findings.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1148

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