Exchange Rate Pass-Through When Market Share Matters

42 Pages Posted: 23 Apr 2004 Last revised: 13 Jun 2022

See all articles by Kenneth Froot

Kenneth Froot

Harvard University Graduate School of Business; National Bureau of Economic Research (NBER)

Paul Klemperer

University of Oxford - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: March 1988

Abstract

We investigate pricing to market when the exchange rate changes in cases where firms' future demands depend on their current market shares. We show that i) profit maximizing foreign firms may either raise or lower their domestic currency export prices when the domestic exchange rate appreciates temporarily (i.e. the "pass-through" from exchange rate changes to import prices may be perverse); ii) current import prices may be more sensitive to the expected future exchange rate than to the current exchange rate; iii) current import prices fall in response to an increase in uncertainty about the future exchange rate. We present evidence that suggests the behavior of expected future exchange rates may provide a clue to the puzzling behavior of U.S. import prices during the 1980s.

Suggested Citation

Froot, Kenneth and Klemperer, Paul, Exchange Rate Pass-Through When Market Share Matters (March 1988). NBER Working Paper No. w2542, Available at SSRN: https://ssrn.com/abstract=425569

Kenneth Froot (Contact Author)

Harvard University Graduate School of Business ( email )

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HOME PAGE: http://https://scholar.harvard.edu/kenfroot

National Bureau of Economic Research (NBER) ( email )

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Paul Klemperer

University of Oxford - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

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