A Model of Exchange Rate Pass-through
NOTE: At the time of publication, the author Eric Fisher was not yet affiliated with Cal Poly.
Exchange rate pass-through is the phenomenon whereby changes in the value of foreign exchange are reflected in changes in import prices. This paper presents a model in which firms are price setters who anticipate exchange rate changes. In equilibrium, firms' strategies incorporate expectations about the exchange rate consistently and are best responses to the strategies of all others in the world market. It is shown that exchange rate changes give rise to import price changes, but the degree of exchange rate pass-through depends upon domestic and foreign market structures and the exchange rate regime. In general, exchange rate pass-through is higher if the home market is monopolistic or if the foreign market is competitive. The paper concludes with an examination of disaggregated Japanese manufacturing price indices, and it shows that the degree of exchange rate pass-through was indeed correlated with industry concentration during the most recent period of the yell's depreciation against the dollar.
Eric O'N. Fisher. "A Model of Exchange Rate Pass-through" Journal of International Economics 26.1-2 (1989): 119-138.
Available at: http://works.bepress.com/efisher/37