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Title:Exchange rate pass-through: Theoretical and empirical issues
Author(s):Bishop, Paul Charles
Doctoral Committee Chair(s):Grinols, Earl L.
Department / Program:Economics
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):Economics, General
Economics, Theory
Abstract:This dissertation examines several theoretical and empirical issues associated with exchange rate pass-through, defined as the percentage change in import prices for a one percent change in the exchange rate. The theoretical sections of this study posit a conjectural variations model of industrial competition. In its simplest form there is one domestic and one foreign firm that each set a price for a differentiated good based on simple profit maximization criteria under various conjectures about the other firm's response. Unlike previous pass-through models, it is recognized that firms use inputs that can be from a home or foreign country supplier. Sourcing is defined as the extent to which one firm uses as an input a good from the other country. Therefore, the extent to which each firm uses a sourced input will expose each firm's costs to exchange rate fluctuations. It is shown that as the extent of sourcing by the foreign firm increases, the pass-through elasticity on domestic import prices becomes more inelastic. Thus, we would expect that as the amount of inter-industry trade in intermediate goods increases, import prices would become less responsive to the exchange rate. The model is extended to an industry structure where there is a set of identical domestic and a set of identical foreign firms. It is shown that as the number of foreign firms increases, the pass-through elasticity becomes more elastic.
The empirical section of the study estimates exchange rate pass-through for manufactured goods and for auto imports from five countries. Using the technique of Transfer Function-Noise Models, it is shown that for manufactured goods, import prices did not change as much as historical experience would have suggested given the exchange rate swing of the eighties. A statistically valid measure of the size of the deviation is calculated along with a test for structural stability of the model. In all cases, the test for stability indicated that a structural change occurred during the early eighties exchange rate appreciation. Similar results are also derived for auto imports from Germany, Italy and Japan.
Issue Date:1994
Rights Information:Copyright 1994 Bishop, Paul Charles
Date Available in IDEALS:2011-05-07
Identifier in Online Catalog:AAI9512302
OCLC Identifier:(UMI)AAI9512302

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