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Does nominal rigidity mislead our perception of the exchange rate pass-through?

Author

Listed:
  • Olivier de Bandt
  • Tovonony Razafindrabe
Abstract
Relying on a novel dataset of detailed micro-data on import prices, this paper explores the close link that exists between nominal import price rigidity and the extent of exchange rate pass-through (ERPT). We show that previous evidence in favor of incomplete and low value of ERPT in the empirical literature may be explained by two factors: the relative importance of small variations in the exchange rate and, mainly, nominal rigidity. Once nominal rigidity is taken into account, we nd for French manufacturers that ERPT may be incomplete in the short run, but with relatively high value, and complete in the long run. In addition, assessing non-linearity and asymmetry issues, we provide evidence that the shape of the import price reaction function is distorted by the presence of nominal rigidity. Indeed, the linearity assumption is veri ed once nominal rigidity is taken into account. However, in the case where it is rejected, the import price reaction function is concave rather than convex, indicating that rms aim at protecting market shares. As a consequence, the common belief that "prices rise faster than they fall" is the results of nominal import price rigidity as far as ERPT is concerned.

Suggested Citation

  • Olivier de Bandt & Tovonony Razafindrabe, 2014. "Does nominal rigidity mislead our perception of the exchange rate pass-through?," EconomiX Working Papers 2014-36, University of Paris Nanterre, EconomiX.
    • Handle: RePEc:drm:wpaper:2014-36
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    References listed on IDEAS

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    More about this item

    Keywords

    Exchange rate pass-through; nominal rigidity; import price.;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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