State dependent pricing, invoicing currency, and exchange rate pass-through

We analyze exchange rate pass-through and volatility of import prices in a dynamic framework where firms are subject to menu costs and decide on price adjustments in response to exchange rate innovations. The exchange rate pass-through and import price volatility then depend on the invoicing currenc...

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Bibliographic Details
Published in:Journal of international economics 2006-09, Vol.70 (1), p.178-196
Main Authors: Flodén, Martin, Wilander, Fredrik
Format: Article
Language:English
Subjects:
Currencies
Exchange rate pass-through
Exchange rates
Foreign exchange rates
Imports
Invoices
Invoicing
Invoicing currency
Nominal rigidities
Prices
Pricing
State
State dependent pricing
Studies
Volatility
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Summary:We analyze exchange rate pass-through and volatility of import prices in a dynamic framework where firms are subject to menu costs and decide on price adjustments in response to exchange rate innovations. The exchange rate pass-through and import price volatility then depend on the invoicing currency in combination with functional forms of cost and demand functions. In particular, there is lower pass-through, less frequent price adjustments, and lower price volatility when prices are set in the importer's currency than when prices are set in the exporter's currency.
ISSN:0022-1996
1873-0353
1873-0353
DOI:10.1016/j.jinteco.2005.08.002