The Federal Reserve Board eagle logo links to Board's home page

International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Menu Costs, Trade Flows, and Exchange Rate Volatility
Logan T. Lewis
2014-1102  (April 2014)

Abstract:  U.S. imports and exports respond little to exchange rate changes in the short run. Pricing behavior has long been thought central to explaining this response: if local prices do not respond to exchange rates, neither will trade flows. Sticky prices and strategic complementarities in price setting generate sluggish responses, and they are necessary to match newly available international micro price data. Using trade flow data, I test models capable of replicating these trade price data. Even with significant pricing frictions, the models still imply a trade response to exchange rates stronger than found in the data. Moreover, using significant cross-sector heterogeneity, comparative statics implied by the model find little to no support in the data. These results suggest that while complementarity in price setting and sticky prices can explain pricing patterns, some other short-run friction is needed to match actual trade flows. Furthermore, the muted response found for sectors with high long-run substitutability implies that simply assuming low elasticities may be inappropriate. Finally, there is evidence of an asymmetric response to exchange rate changes.

Full paper (541 KB PDF)

Trade prices, pass-through, trade elasticities

PDF files: Adobe Acrobat Reader   ZIP files: PKWARE

Home | IFDPs | List of 2014 IFDPs
Accessibility | Contact Us
Last update: April 15, 2014