Trade integration, competition, and the decline in exchange-rate pass-through
By: Christopher Gust, Sylvain Leduc, and Robert J. Vigfusson
Contributors: Leduc, Sylvain, 1969-; Vigfusson, Robert J.; Board of Governors of the Federal Reserve System (U.S.)
Series: International finance discussion papers -- no. 864; International finance discussion papers (Online) -- no. 864.
Publisher: Federal Reserve Board
Published: 2006
Place of publication: Washington, D.C
Language: eng
Format: [electronic resource] /
Description: "Over the past twenty years, U.S.  import prices have become less responsive to the exchange rate.  We propose that a significant portion of this decline is a result of increased trade integration.  To illustrate this effect, we develop an open economy DGE model in which trade occurs along both the intensive and extensive margins.  The key element we introduce into this environment is strategic complementarity in price setting.  As a result, a firm's pricing decision depends on the prices set by its competitors.  This feature implies that a foreign exporter finds it optimal to vary its markup in response to shocks that change the exchange rate, insulating import prices from exchange rate movements.  With increased trade integration, exporters have become more responsive to the prices of their competitors and this change in pricing behavior accounts for a significant portion of the observed decline in the sensitivity of U.S import prices to the exchange rate"--Federal Reserve Board web site.
Notes: Title from PDF file as viewed on 10/2/2006.

Includes bibliographical references.

Also available in print.

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Mode of access: World Wide Web.