Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82473
Authors: 
Flodén, Martin
Wilander, Fredrik
Year of Publication: 
2004
Series/Report no.: 
Sveriges Riksbank Working Paper Series 174
Abstract: 
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 pricing convention in combination with functional forms of cost and demand functions. In particular, there is lower pass-through, less frequent price adjustments, lower price volatility, and slightly lower average prices when prices are set in the importer’s currency than when prices are set in the exporter’s currency. The degree of pass-through also depends on the magnitude of exchange rate innovations. Large exchange rate innovations raise pass-through if prices are set in the importer’s currency but reduce pass-through if prices are set in the exporter’s currency. Finally, the presence of inflation can generate a substantial asymmetry in price adjustments. This asymmetry could lead to pitfalls when empirically estimating pass-through, and we present some potential resolutions to this estimation problem.
Subjects: 
Exchange rate pass-through
Nominal rigidities
Invoicing
State dependent pricing
JEL: 
D40
E30
F31
F40
Document Type: 
Working Paper

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