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Who Bears the Cost of a Change in the Exchange Rate?

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Author Info
Rebecca Hellerstein

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Abstract

Nominal exchange rates are remarkably volatile. They ordinarily appear disconnected from the fundamentals of the economies whose currencies they price. These facts make up a classic puzzle about the international economy. If prices do not respond fully to changes in the nominal exchange rate, who bears the cost of such large and unpredictable changes: foreign firms, domestic firms, or domestic consumers? This study develops a structural approach to analyze the welfare effects of a change in the nominal exchange rate using the example of the beer market. I estimate a structural econometric model that makes it possible to compute manufacturers’ and retailers’ pass-through of a nominal exchange-rate change without observing wholesale prices or firms’ marginal costs. I conduct counterfactual experiments to quantify how the change affects domestic and foreign firms’ profits and domestic consumer welfare. The counterfactual experiments show that foreign manufacturers bear more of the cost of a change in the nominal exchange rate than do domestic consumers, domestic manufacturers, or the domestic retailer. Following a 10-percent domesticcurrency depreciation, foreign manufacturers’ profits decline by 22 percent, domestic consumer surplus falls by 8 percent, the retailer’s profits fall by 5 percent, and domestic manufacturers’ profits increase by 1.7 percent. The model can be applied to other industries and can serve as a tool to assess the welfare effects of various exchange-rate policies

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 589.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:589

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Related research
Keywords: exchange-rate pass-through: cross-border vertical contracts;

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. José M. Campa & Linda S. Goldberg & José M. González-Mínguez, 2005. "Exchange rate pass through to import prices in the euro area," Banco de España Working Papers 0538, Banco de España. [Downloadable!]
    Other versions:
  2. Charles P. Thomas & Jaime Marquez, 2006. "Measurement matters for modeling U.S. import prices," International Finance Discussion Papers 883, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. Charles P. Thomas & Jaime Marquez, 2009. "Measurement matters for modelling US import prices

    This article is a U.S. Government work and is in the public domain in the U.S.A.

    ," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(2), pages 120-138. [Downloadable!]
  4. Morten Overgaard Ravn & Stephanie Schmitt-Grohe & Martin Uribe, . "Incomplete Cost Pass-Through Under Deep Habits," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics. [Downloadable!] (restricted)
    Other versions:
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