Price Commitment Versus Flexibility: The Role of Exchange Rate Uncertainty and its Implications for Exchange Rate Passthrough

15 Pages Posted: 12 Oct 2003

See all articles by Byoung-Ky Chang

Byoung-Ky Chang

Silla University - Division of International Commerce and Economics

Harvey E. Lapan

Iowa State University - Department of Economics

Abstract

The paper investigates the incentives to commit price or retain price flexibility in a model in which exporting firms face different degrees of exchange rate uncertainty. The result shows that introducing exchange rate uncertainty can lead to the endogenous emergence of a unique leader-follower equilibrium; which firm emerges as price leader depends on the substitutability of products, the magnitude of exchange rate uncertainty, and the cost structure. This study may provide one explanation as to why some exporters set price before the realization of the nominal exchange rates ("sticky price"). The results imply exchange rate variability affects exchange rate passthrough.

Suggested Citation

Chang, Byoung-Ky and Lapan, Harvey E., Price Commitment Versus Flexibility: The Role of Exchange Rate Uncertainty and its Implications for Exchange Rate Passthrough. Available at SSRN: https://ssrn.com/abstract=450976

Byoung-Ky Chang (Contact Author)

Silla University - Division of International Commerce and Economics ( email )

Busan
Korea, Republic of (South Korea)

Harvey E. Lapan

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States
515 294-5917 (Phone)

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