Economics, Econometrics and Finance
6 years ago

Exchange rates drive import prices up, but consumer prices stay steady.

Why Do Consumer Prices React less than Import Prices to Exchange Rates?
Philippe Bacchetta, Eric van Wincoop

Paper Summary

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Consumer prices react less than import prices to exchange rates because domestic firms prefer to price in domestic currency due to competition from other domestic sectors. This leads to complete pass-through to import prices but zero pass-through to consumer prices.