Exchange Rate Pass-Through in Vertically Related Markets

Posted: 29 Dec 1998 Last revised: 13 Jan 2012

See all articles by Yunus Aksoy

Yunus Aksoy

Birkbeck University of London

Yohanes E. Riyanto

Nanyang Technological University (NTU) - Division of Economics

Abstract

We provide a theoretical framework which addresses exchange rate pass-through within the setting of vertically related markets. In particular, foreign firms' price adjustment in response to an exchange rate shock is evaluated. This framework enables us to study the importance of cost effects of the exchange rate shock. Recent empirical evidence in Athukorala and Menon (1994) and Campa and Goldberg (1995, 1996) indicates the relevance of these cost effects. We show that one can decompose the effects on an exchange rate shocks on the final good market into a direct and indirect component. The indirect effect works through the input market. The degree of pass-through then depends on the relative importance of direct and indirect effects, which in turn depends on the nature of vertical structures and strategic firm behavior. We show that the institutional aspects of vertically related markets, i.e. vertical integration or vertical separation, play a role in explaining incomplete price adjustments in both intermediate and final good markets and the failure of PPP in the short run.

JEL Classification: D43, E30, L13

Suggested Citation

Aksoy, Yunus and Riyanto, Yohanes E., Exchange Rate Pass-Through in Vertically Related Markets. Review of International Economics, Vol. 8, No. 2, pp. 235-251, 2000. Available at SSRN: https://ssrn.com/abstract=142555

Yunus Aksoy (Contact Author)

Birkbeck University of London ( email )

Malet Street
Room: 726
London WC1E 7HX
United Kingdom
+44 (0) 20 7631 6407 (Phone)
+44 (0) 20 7631 6416 (Fax)

Yohanes E. Riyanto

Nanyang Technological University (NTU) - Division of Economics ( email )

HSS 04-53, 14 Nanyang Drive
Singapore, 639798
Singapore

Register to save articles to
your library

Register

Paper statistics

Abstract Views
733
PlumX Metrics