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Price Commitment versus Flexibility: the Role of Exchange Rate Uncertainty and its Implications for Exchange Rate Passthrough
Author(s) -
Chang ByoungKy,
Lapan Harvey E.
Publication year - 2003
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00412
Subject(s) - commit , economics , exchange rate , flexibility (engineering) , exchange rate flexibility , monetary economics , incentive , microeconomics , econometrics , exchange rate regime , management , database , computer science
The paper investigates the incentives to commit price or retain price flexibility in a model in which exporting firms face different degrees of exchange rate uncertainty. The result shows that introducing exchange rate uncertainty can lead to the endogenous emergence of a unique leader–follower equilibrium; which firm emerges as price leader depends on the substitutability of products, the magnitude of exchange rate uncertainty, and the cost structure. This study may provide one explanation as to why some exporters set price before the realization of the nominal exchange rates (“sticky price”). The results imply exchange rate variability affects exchange rate passthrough.