Currency appreciation, distance to border and price changes: Evidence from Swiss retail prices

Reto Foellmi, Adrian Jaeggi () and Fabian Schnell ()

No 2007, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

Abstract: How does the exchange rate affect the way that firms adjust their prices? We use quarterly firm and product price data, underlying the Swiss sectoral consumer price index. The data allows us to trace the pricing decisions of the identified firm over time and as a function of the distance to the border distance. The appreciation of the Swiss franc results in an increase in the probability of both positive and negative price changes. When a firm is more closely located to the border, the probability of a negative price change is higher. On the intensive margin, we document that an appreciation of the Swiss Franc leads to price reductions, and that this effect is stronger the closer a firm is located to the nearest border. However, for firms located far away from the border, an appreciation of the Swiss Franc leads to no price reductions or even increases. We rationalise this by the relative strengths of income and substitution effects. The substitution effect dominates for firms close to the border, while the income effect dominates for firms located further away from the border.

Keywords: Price setting behavior of firms; exchange rate; distance to border (search for similar items in EconPapers)
JEL-codes: E30 E31 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2020-04
New Economics Papers: this item is included in nep-gen, nep-mac and nep-mon
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Working Paper: Currency appreciation, distance to border and price changes: Evidence from Swiss retail prices (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:usg:econwp:2020:07

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