Pricing to Market and the Real Exchange

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Pricing to Market and the Real Exchange Rate Author(s): Hamid Faruqee Reviewed work(s): Source: Staff Papers - International Monetary Fund, Vol. 42, No. 4 (Dec., 1995), pp. 855-881 Published by: Palgrave Macmillan Journals on behalf of the International Monetary Fund Stable URL: . Accessed: 22/02/2013 10:54
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IMFStaffPapers Vol. 42, No. 4 (December1995) © 1995International Fund Monetary

Pricing to Market and the Real Exchange Rate

Thispaper investigates the consequences of pricing to marketfor exchange ratepass-through and real exchange rate dynamics across differentpatterns of trade. Under two-way, intraindustrytrade-where home prices display greater linkage with those of foreign competitors-domestic and export prices exhibit lower pass-through and greater destination-specific adjustment compared to intersectoraltrade. Withboth tradepatterns, pricing-tomarket behavior intensifies the degree of persistence in the real exchange rate under nominal rigidities, and allows monetary shocks to have permanent…...

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