Essays on the relationship between exchange rates and prices

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  • March 20, 2019
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  • Witte, Mark David
    • Affiliation: College of Arts and Sciences, Department of Economics
Abstract
  • The border effect is created when violations of the law of one price are greater between cities in different countries than cities in the same country. In Chapter 1, I introduce a method that leads to more accurate estimates of the proportion of the border effect attributable to 'sticky' prices and a more volatile exchange rate. Employing this method on price index data, I find that this proportion varies depending on the good; from 8% to 91% and averaging 53%. For non-indexed annual commodity prices, the proportion is estimated as 11% to 58% depending on the good and averaging 36%. These results are predicated on first stage estimates that are statistically questionable. Exchange rate pass-through is defined as the percentage change in the relative prices between different countries for a given change in the exchange rate. In Chapter 2, I test different possible determinants for the pass-through rate including, uniquely, the exporting country's macroeconomic information using a new dataset of U.S. imports of 96,739 unit value observations from 57 countries of 253 goods. There is a significant, positive relationship between the country specific pass-through rate and the exporter's long term monetary volatility or the exporter's long term average inflation. Short term price volatility in the exporting country significantly decreases the pass-through rate. This is empirical evidence for the theoretically predicted effects of short term and long term inflation introduced by Taylor (2000). Firms engaging in international trade must choose what currency in which to denominate their price and how often to change their price. In Chapter 3, I model the optimal currency of denomination for traded goods in the presence of an endogenous frequency of price adjustment: enabling a more detailed analysis than in previous theoretical studies regarding "herding" and exchange rate volatility. By "herding" a firm chooses a currency of denomination in order to maintain a stable unit of account with its competitors. The dynamic model suggests that exporting firms will "herd" with the local currency, producer's currency or a vehicle currency. Greater exchange rate volatility amplifies the representative firm's desire to "herd" relative to all other considerations.
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  • In Copyright
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  • Black, Stanley W.
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  • Open access
Date uploaded
  • October 19, 2010

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