A decomposition of the sources of incomplete cross-border transmission

No 250, Staff Reports from Federal Reserve Bank of New York

Abstract: Despite its importance, the microeconomics of the international transmission of shocks is not well understood. The conventional wisdom is that relative price changes are the primary mechanism by which shocks are transmitted across borders. Yet traded-goods prices exhibit significant inertia in the face of shocks such as exchange rate changes. This paper uses a structural model to quantify the relative importance of manufacturers' and retailers' local-cost components and markup adjustments as sources of this incomplete transmission. The model is applied to a panel dataset of one industry with retail and wholesale prices for UPC (Universal Product Code)-level products. Markup adjustments by manufacturers and the retailer explain two-thirds of the incomplete transmission, and local-cost components account for the remaining one-third. Foreign manufacturers generally bear more of the cost (or reap more of the benefit) of an exchange-rate-induced marginal cost shock than do domestic consumers, domestic manufacturers, or the domestic retailer.

Keywords: Business cycles; Retail trade; Manufactures; Prices; International trade (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (7)

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Related works:
Working Paper: A Decomposition of the Sources of Incomplete Cross-Border Transmission (2005)
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