Article2009

Pass‐Through of Exchange Rates and Competition between Floaters and Fixers

116 citations0/0 files storedJournal of money credit and banking

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Monetary Policy and Economic Impact Global trade and economics Global Financial Crisis and Policies

Abstract

This paper studies how a rise in the share of U.S. imports from China, or any country with a fixed exchange rate, can explain a disproportionate fall in exchange rate pass‐through to U.S. import prices. A theoretical model provides an explanation working through changes in markups, showing that a particular “local bias” condition is necessary and that free entry amplifies the effect. The model produces a structural equation for pass‐through regressions including the China share; panel regressions over 1993–2006 indicate that the rising share of trade from China or other exchange rate fixers can explain as much as one‐half of the observed decline in pass‐through for the United States.

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References

2003Testing for unit roots in heterogeneous panels 1975MONOPOLISTIC COMPETITION AND OPTIMUM PRODUCT DIVERSITY 1999Pooled Mean Group Estimation of Dynamic Heterogeneous Panels 1995Estimating long-run relationships from dynamic heterogeneous panels 1976Exact and superlative index numbers 1996Goods Prices and Exchange Rates: What Have We Learned?2000Low inflation, pass-through, and the pricing power of firms 2005Exchange Rate Pass-Through into Import Prices

Cited by

2016Toward a theory of monopolistic competition 2014Exchange Rate Pass-Through in the Global Economy: The Role of Emerging Market Economies 2010Globalization, Markups and U.S. Welfare 2015The Elusive Pro-Competitive Effects of Trade 2009How do Different Exporters React to Exchange Rate Changes? Theory, Empirics and Aggregate Implications 2011Prices and Exchange Rates: A Theory of Disconnect 2010Product Variety and the Gains from International Trade

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