Template-type: ReDIF-Paper 1.0
Author-Name: Raphael A. Auer
Author-Name-First: Raphael A.
Author-Name-Last: Auer
Author-Person: pau28
Author-Name: Thomas Chaney
Author-Name-First: Thomas
Author-Name-Last: Chaney
Author-Person: pch504
Title: Cost Pass Through in a Competitive Model of Pricing-to-Market
Abstract: This paper builds up an extension to the Mussa and Rosen (1978) model of quality pricing under perfect competition. Our model incorporates decreasing returns to scale. First, we predict that exchange rate shocks are imperfectly passed through into prices. Second, prices of low quality goods are more sensitive to exchange rate shocks than prices of high quality goods. Third, in response to an exchange rate appreciation, the composition of exports shifts towards higher quality and more expensive goods. We test those predictions using highly disaggregated price and quantity US import data. We find that the prices of high quality goods, proxied as high unit price goods, are more sensitive to exchange rate movements. Moreover, we find evidence that in response to an exchange rate appreciation, the composition of exports shifts towards high unit price goods.
Length: 42 pages
Creation-Date: 2008
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2008/working_paper_2008_06
File-Format: text/html
Number: 2008-06
Classification-JEL: F11, F31, F41
Keywords: Pricing-to-Market, Exchange Rate Pass Through, Local Distribution
Handle: RePEc:snb:snbwpa:2008-06