International Prices and Exchange Rates
We survey the recent empirical and theoretical developments in the literature on the relation between prices and exchange rates. After updating some of the major findings in the empirical literature we present a simple framework to interpret this evidence. We review theoretical models that generate insensitivity of prices to exchange rate changes through variable markups, both under flexible prices and nominal rigidities, first in partial equilibrium and then in general equilibrium.
This paper has been prepared for the Handbook of International Economics, Volume IV, edited by Gita Gopinath, Elhanan Helpman and Kenneth Rogo. We thank Dennis Kuo and Mikkel Plagborg-Moller for outstanding research assistance. We also thank George Alessandria, Andrew Atkeson, Javier Cravino, Charles Engel, Virgiliu Midrigan, Helene Rey and Jon Steinsson for detailed comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.