Exchange rate pass-through and the role of expectations

Exchange rate pass-through and the role of expectations
Speaker:  Chiara Tomasi - Università di Trento
  Wednesday, February 7, 2018 at 12:30 PM Polo Santa Marta, Via Cantarane 24, Room 1.59
This paper reveals a previously unexplored channels through which the behavior of firms influences the transmission of exchange rate movements into consumer prices, i.e. the degree of exchange rate pass-through. On the basis of a rich dataset of French firm-product-destination international transactions, the work explores empirically the impact of expected exchange rate variations on the individual firms’ export pricing. First, the analysis provides evidence that expectations about future exchange rate movements alter firms’ current pricing decisions.  Second, the empirical results indicate that the degree of exchange rate pass-through depends on whether the observed changes are expected to be either permanent or temporary. This finding is reconcilable with the model provided by Froot and Klemperer (1989) where, due to demand rigidities related to consumer switching costs, there exist intertemporal links between today’s market shares and tomorrow’s profits. Finally, the analysis shows that the reaction of firms to temporary versus permanent exchange rate variations is heterogeneous and depends on the level of the exporter' market power.

Programme Director
Angelo Zago

External reference
Luigi Grossi

Publication date
September 8, 2017