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Dominique M. Gross and Mr. Nicolas Schmitt
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.
Dominique M. Gross and Mr. Nicolas Schmitt

Front Matter Page IMF Institute Authorized for distribution by Roland Daumont Contents I. Introduction II. Theoretical framework III. The data IV. Empirical investigation A. First-Step: Cointegration Analysis B. Second-Step: Estimation of the short-run parameters V. Results A. Exchange Rate Pass-Through B. Price Rivalry C. Price Dynamics VI. Conclusion Tables 1. Unit-Root Tests 2. Tests for the Residuals of the VAR Estimates 3. System Estimation and Cointegration Tests 4. Pricing Equations: Small

Dominique M. Gross and Mr. Nicolas Schmitt

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). B. Price Rivalry Consider now the short-term price