Pricing to Market when the Exchange Rate Changes

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It has been widely remarked that US import prices have not fully reflected movements in the exchange rate. This paper begins with an investigation of the actual extent of "pricing to market" by foreign suppliers. It shows that pricing to market is a real phenomenon, but not universal; in particular, evidence on German export prices suggests that stickiness of import prices is largely confined to machinery and transport equipment. The paper then considers a number of possible models. While the evidence is not sufficient to distinguish among thesemodels, it seems probable that a full explanation will involve both dynamics and imperfect competition.

Published: Arndt, Sven W. and J. David Richardson (eds.) Real-financial linkages among open economies. Cambridge, MA and London: MIT Press, 1987.

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