Write a research project discussing a topic on Exchange Rate Pass Through and Pricing to Market
The paper should follow the basic structure:
I. The paper should start with a short introduction/motivation section. Why should anyone care about your topic? Here talk about specifics, current events, politics, etc. (~1 pg). Be sure to establish a clear thesis (argument/focus) and lay out preliminary support you will reference throughout the next section.
- Use sources from reputable publications here (NY Times, Wall Street Journal, Economist, etc)
II. Next, you are expected to review the major contributions on the topic and the current state of the literature, citing at minimum five sources scholarly sources. This should be the bulk of your paper (~3-4 pgs). It is a literature review of your topic. If you have a specific topic (e.g. a specific trade deal, etc) then be sure to generalize your topic for this section. So if you were discussing NAFTA or Brexit, you would want to discuss recent literature on free trade agreements/areas for the literature review. Here you want to discuss general theories on your topic so that you can establish the necessary economic relationships.
- Use scholarly sources here (Journal Articles, Federal Reserve, IMF or NBER Studies, etc)
III. Extension. You just reviewed the literature on a specific subject. Here you should suggest an extension to the current literature (~.5 pgs). What is missing from the literature you reviewed (could be a new data set, case study, research methodology)?
IV. Conclusion. Wrap it up. Tie together the support presented above to call back to main thesis (~ .5 pg).
V. Reference Section that links to in-text citations. Use any citation format you choose (APA, MLA, etc), just be consistent throughout the paper. If you choose to, you can simply footnote within the text and forego this section.
Introduction
Exchange rate pass-through is the extent to which changes in the exchange rate are reflected in changes in import and export prices. Pricing to market is a strategy by which firms set prices in different markets based on the prices in those markets, rather than simply converting their home-currency prices into foreign currency.
These two concepts are important for understanding how changes in exchange rates affect inflation and trade. For example, if exchange rate pass-through is high, then a depreciation of the domestic currency will lead to a rise in import prices, which will in turn lead to higher inflation. On the other hand, if pricing to market is high, then a depreciation of the domestic currency will have little effect on import prices, as firms will simply raise their prices in foreign currency to offset the depreciation.
Literature Review
The literature on
exchange rate pass-through and pricing to market is extensive. A number of factors have been found to affect the degree of pass-through, including the degree of competition in the market, the level of trade costs, and the flexibility of prices. Pricing to market is more likely to occur in markets with high levels of competition and low trade costs.
One recent study by Chen and Juvenal (2014) found that the degree of exchange rate pass-through has declined in recent years. They argue that this is due to a number of factors, including the rise of pricing to market, the increasing importance of emerging markets in world trade, and the adoption of inflation targeting by central banks.
Extension
One area for future research is to examine
the impact of exchange rate pass-through on the distribution of income. A depreciation of the domestic currency will lead to higher import prices, which will disproportionately hurt consumers with lower incomes. This is because consumers with lower incomes spend a larger share of their income on imported goods.
Another area for future research is to examine the impact of exchange rate pass-through on the real exchange rate. The real exchange rate is the price of domestic goods relative to foreign goods. A depreciation of the domestic currency will lead to a real depreciation, which will make domestic goods cheaper relative to foreign goods. This will lead to an increase in exports and a decrease in imports, which will boost economic growth.
Conclusion
Exchange rate pass-through and pricing to market are important concepts for understanding how changes in exchange rates affect inflation and trade. The literature on these topics is extensive, and there are a number of factors that affect the degree of pass-through. Future research should focus on the impact of exchange rate pass-through on the distribution of income and the real exchange rate.
References
- Chen, N., and L. Juvenal. 2014. "Quality, Trade, and Exchange Rate Pass-Through." Journal of International Economics 92 (2): 253-270.
- Froot, K. A., and J. C. Stein. 1991. "Exchange Rate Pass-Through under Stochastic Regimes." Journal of International Economics 31 (3): 437-468.
- Goldberg, P. K., and M. M. Knetter. 1997. "Pass-through of Exchange Rates and Purchasing Power Parity." Review of Economics and Statistics 79 (2): 174-186.
- Krugman, P. R. 1987. "Pricing to Market When the Exchange Rate Changes." In Handbook of International Economics, Vol. 3, edited by R. W. Jones and P. B. Kenen, 397-431. Amsterdam: Elsevier.