NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Exchange Rate Pass-Through When Market Share Matters

Kenneth A. Froot, Paul Klemperer

NBER Working Paper No. 2542 (Also Reprint No. r1300)
Issued in October 1989
NBER Program(s):   ITI   IFM

We investigate pricing to market when the exchange rate changes in cases where firms' future demands depend on their current market shares. We show that i) profit maximizing foreign firms may either raise or lower their domestic currency export prices when the domestic exchange rate appreciates temporarily (i.e. the "pass-through" from exchange rate changes to import prices may be perverse); ii) current import prices may be more sensitive to the expected future exchange rate than to the current exchange rate; iii) current import prices fall in response to an increase in uncertainty about the future exchange rate. We present evidence that suggests the behavior of expected future exchange rates may provide a clue to the puzzling behavior of U.S. import prices during the 1980s.

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Document Object Identifier (DOI): 10.3386/w2542

Published: "Exchange-Rate Pass Through When Market Share Matters." From The American Economic Review, Vol. 79, No. 4, pp. 637-654, (September 1989). citation courtesy of

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