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Pass-Through of Exchange Rates and Competition between Floaters and Fixers

Paul R. Bergin and Robert C. Feenstra
Journal of Money, Credit and Banking
Vol. 41, Supplement 1 (Feb., 2009), pp. 35-70
Published by: Wiley
Stable URL: http://www.jstor.org/stable/25483526
Page Count: 36
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Pass-Through of Exchange Rates and Competition between Floaters and Fixers
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Abstract

This paper studies how a rise in the share of U.S. imports from China, or any country with a fixed exchange rate, can explain a disproportionate fall in exchange rate pass-through to U.S. import prices. A theoretical model provides an explanation working through changes in markups, showing that a particular "local bias" condition is necessary and that free entry amplifies the effect. The model produces a structural equation for pass-through regressions including the China share; panel regressions over 1993-2006 indicate that the rising share of trade from China or other exchange rate fixers can explain as much as one-half of the observed decline in pass-through for the United States.

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