State dependent pricing, invoicing currency, and exchange rate pass-through |
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Authors: | Martin Flodé n,Fredrik Wilander |
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Affiliation: | a Department of Economics, Stockholm School of Economics, Box 6501, SE-113 83 Stockholm, Sweden b CEPR, 90-98 Goswell Road, London EC1V 7RR, UK |
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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 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. |
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Keywords: | D40 E30 F31 F40 |
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