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MARKET CONDUCT, PRICE INTERDEPENDENCE AND EXCHANGE RATE PASS-THROUGH

                                                                Sophocles N. Brissimis
                                                 Bank of Greece and University of Piraeus

                                                                  Theodora S. Kosma
                                                                     Bank of Greece

ABSTRACT

This paper develops an international oligopoly model where foreign and domestic firms simultaneously choose their pricing strategies under the assumption of non-zero conjectural variations. The model captures the links between domestic and foreign producers’ prices and establishes a relationship between the price of domesticallyproduced goods and the exchange rate, which appears to be important for the determination of exchange rate pass-through. It is also found that the equilibrium pass-through elasticity can be less than, equal to or greater than one depending on exporting and domestic firms’ conjectural variations. The empirical implications of the model are tested with the Johansen multivariate cointegration technique using data for Japanese firms’ exports to the US market. The results indicate that US producer prices are indeed influenced by the prices of their Japanese competitors and that the pass-through elasticity is less than one.

Keywords: Exchange rate pass-through; Conjectural variations; Translog expenditure function; Multivariate cointegration.

JEL classification: C32; F39; L13

Acknowledgements: We are grateful to Heather Gibson and Tassos Anastasatos for helpful comments. The views expressed in the paper are of the authors and do not necessarily reflect those of the Bank of Greece.

Correspondence:

Sophocles N. Brissimis,
Economic Research Department,
Bank of Greece, 21 E. Venizelos Ave.,
102 50 Athens, Greece,
Tel. +30 210-320 2388
Fax: +30 210 320 2432
Email: sbrissimis@bankofgreece.gr


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