Pricing to Market and the Real Exchange Rate
IMF Working Papers, January 1, 1995
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Bibliographic details
- Authors: Hamid Faruqee
- Published: January 1, 1995
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451842845.001
Summary
- This paper investigates the consequences of pricing to market for exchange rate pass-through and real exchange rate dynamics across different patterns of trade under market segmentation.
- Under two-way, intraindustry trade—where home prices display greater linkage with those of foreign competitors—domestic and export prices exhibit lower pass-through and greater destination-specific adjustment compared to intersectoral trade.
- With both trade patterns, pricing-to-market behavior intensifies the degree of persistence in the real exchange rate under nominal rigidities, and allows monetary shocks to have permanent effects on relative prices when goods markets remain segmented.
Major findings on trade patterns and price behavior
- Two-way, intraindustry trade:
- Home prices show greater linkage with foreign competitors.
- Domestic and export prices exhibit lower pass-through.
- Greater destination-specific price adjustment is observed.
- Intersectoral trade:
- Relative to intraindustry trade, pass-through is higher and destination-specific adjustment is lower.
- Common to both trade patterns:
- Pricing-to-market behavior increases persistence in the real exchange rate under nominal rigidities.
- Pricing-to-market allows monetary shocks to have permanent effects on relative prices when goods markets remain segmented.
Implications for exchange rate pass-through and real exchange rate dynamics
- Pricing-to-market reduces exchange rate pass-through to domestic and export prices in settings with stronger price linkage across competitors.
- Destination-specific pricing adjustments imply heterogeneous price responses across export markets.
- Under nominal rigidities, pricing-to-market amplifies persistence in the real exchange rate.
- Market segmentation combined with pricing-to-market enables monetary shocks to produce permanent relative-price effects.
Subject and keywords
- Subject: Currencies, Exchange rates, Export prices, Foreign exchange, International trade, Money, Prices, Real exchange rates, Trade balance
- Keywords: adjustment cost, Currencies, destination price, Exchange rates, Export prices, foreign currency, goods price, home price-setter, home-currency price, market segmentation, nominal exchange rate, price differential, price inertia, price linkage, price rule, Real exchange rates, relative-price effect, Trade balance, unit of account, WP
Content derived from "Pricing to Market and the Real Exchange Rate", IMF Working Papers (1995, 012).