Pricing-to-Market and Market Structure

26 Pages Posted: 27 Mar 2008

Abstract

Stimulated by imperfect competition/sticky prices framework of the new open economy macroeconomics, empirical research has reconsidered the role of exchange rates in international adjustment. This paper reassesses the link between exchange rates and traded good prices by estimating pricing-to-market equations for the five main euro area countries over the period 1990-99. We minimize selection biases by keeping all manufacturing products and all destination markets and show that exchange rate pass-through (ERPT) is much larger, almost complete, than previously estimated. Thanks to a huge variability in terms of exchange rate variations, products and destination markets, we can map differences in ERPT into market structures and, at the same time, reconcile our results with the empirical literature. We find that ERPT is highly incomplete for sales by oligopolistic industries into advanced economies, indeed in the order of 50-60% as previously estimated. ERPT is instead almost complete in emerging and developing economies where therefore exchange rate movements can help adjust external imbalances. We also find that ERPT is largely asymmetric: it is almost complete after an appreciation of the exporter's currency, rather incomplete after a depreciation. This result is very robust across specifications.

Suggested Citation

Tedeschi, Roberto, Pricing-to-Market and Market Structure. Oxford Bulletin of Economics and Statistics, Vol. 70, Issue 2, pp. 155-180, April 2008, Available at SSRN: https://ssrn.com/abstract=1112176 or http://dx.doi.org/10.1111/j.1468-0084.2007.00493.x

Roberto Tedeschi

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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