Volume 4, No. 1, April 2005

 

Revisiting Perverse Effects on Exchange Rate Pass-Through
Koji Okuguchi

Department of Economics and Information, Gifu Shotoku Gakuen University, Japan

Abstract

The effects of a change in the exchange rate on product prices are investigated using a static international duopoly model without product differentiation. A general condition is derived for perverse exchange rate pass-through assuming decreasing marginal costs for firms in two trading countries. The result is clarified on the basis of a new diagram for determining equilibrium supplies in the two countries.

Key words: exchange rate pass-through; international duopoly; decreasing marginal cost
JEL classification: F1; L1

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