This paper explicitly takes into account the dynamic oligopolistic rivalry among source producers to evaluate the degree of exchange rate pass-through. Using recent time-series techniques for the case of imported automobiles in Switzerland, the results show that prices are strategic complements and that the degree of pass-through is lower in the long run than in the short run. We attribute this to the fact that, although some rivals match long-term price changes, others do not, inducing the producer who faces a change in exchange rate to absorb a greater proportion of the variation.
Front Matter Page IMF Institute
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II. Theoretical framework
III. The data
IV. Empirical investigation
A. First-Step: Cointegration Analysis
B. Second-Step: Estimation of the short-run parameters
A. Exchange Rate Pass-Through
C. Price Dynamics
1. Unit-Root Tests
2. Tests for the Residuals of the VAR Estimates
3. System Estimation and Cointegration Tests
4. Pricing Equations: Small
perverse effect arising from inelastic demand for imports.
Finally, unlike other studies of pass-through, we did not impose constraints on the cost elasticities. There is no clear evidence that the data would support the restriction of symmetric pass-through of exchange rate and costs as there is a significant difference between their respective coefficients. This suggests that prices may not be set in the buyer’s currency (see Gross and Schmitt, 1996 , and Gagnon and Knetter, 1995 , for further evidence).
Consider now the short-term price