The Effects of Foreign Exchange Movements on U.S. Domestic Prices

Abstract

This paper draws on the fields of international economics and industrial organization to model and empirically examine the relationship between currency-value fluctuations and domestic producer prices. The major focus is the issue of whether (and why) domestic industries differ systematically in their response to exchange rate changes. The major findings are that changes in the external value of the U.S. dollar between 1974 and 1987 passed most fully into domestic prices of industries heavily reliant on imported inports and producing goods highly substitutable for imports; highly capital-intensive and concentrated industries and those protected by extensive barriers to entry, both from domestic and foreign sources, have exhibited less domestic price change from the exchange rate movements. Copyright 1989 by MIT Press.

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