Economics, Econometrics and Finance
8 years ago

Innovative firms can control prices through R&D investment and exchange rates.

SSRN Electronic Journal
Market Power, Innovative Activity and Exchange Rate Pass-Through
Sophocles N. Brissimis, Θεοδώρα Κοσμά

Paper Summary

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The article explores how exchange rates, market power, and innovation affect prices in international markets. The researchers created a model to show how firms decide on production levels and research investment, which influences how much exchange rate changes impact prices. They found that the pass-through of exchange rate changes to prices can be less than, equal to, or greater than one, depending on how effective research and development investments are. By studying Japanese firms exporting to the US, they confirmed that prices and research decisions are connected in the long term. This connection is crucial for accurately estimating how exchange rate changes affect prices.