Scientific Monographs, Bank of Finland
No E:25/2003:
Price setting behavior in an open economy and the determination of Finnish foreign trade prices
Hanna Freystätter ()
Abstract: This paper investigates price setting of internationally
traded goods. We develop a theoretical model that incorporates sticky
prices in the currency of both the buyer (local currency pricing) and
seller (producer currency pricing). The nature of price setting is thus
forward looking and the exchange rate effect depends on the relative share
of local currency and producer currency pricing firms in the economy. The
model is estimated with Finnish foreign trade price data for the period
1980–1998. The estimation results seem to support the model. The estimated
share of local currency pricing is 40 percent in the export sector and 60
percent in the import sector implying that there is limited pass-through
from exchange rate to destination-country prices in both sectors.
Keywords: local currency pricing; producer currency pricing; GMM; Finnish foreign trade prices; (follow links to similar papers)
JEL-Codes: F41; (follow links to similar papers)
84 pages, December 12, 2003
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