The Effect of Exchange Rate Shocks on Domestic Prices

Changes in exchange rates directly affect import prices. Since the beginning of 2014, the U.S. dollar has strengthened by 17 percent against the currencies of its major trading partners while import prices have fallen by 4 percent. The pass-through from exchange rates into import prices in the United States is estimated to be quite low, at around 30 percent, and this is often attributed to the fact that imports are mostly invoiced in U.S. dollars. In addition to this direct impact of exchange rates on import prices, there can also be an effect on domestic prices. Suppose that a stronger U.S. dollar means that cars imported from Japan will be cheaper for U.S. consumers. If domestic auto producers do not then reduce their U.S. prices they could lose market share. By how much do they adjust their prices? In this post, we draw on a new study??International Shocks and Domestic Prices: How Large Are Strategic Complementarities???that uses micro-level data for Belgian firms to shed light on this question.