Date of Graduation
I extend the price adjustment cost model to the open economy. To study price variations in response to exchange rate fluctuations, I develop a dynamic model for exporting firms that face convex cost in the adjustment of their prices for the export destination countries. The theoretical findings are that it is optimal for firms not to change their existing prices immediately after a change in exchange rate. The speed of price adjustment is found to depend on discount rate, slope of the demand curve, and cost of price adjustment, while the volatility of the exchange rate has no effect on price adjustment speed. The effects of exchange rates on trade prices are empirically investigated directly from the reduced form solution of the model and with disaggregated data. I have obtained the estimates of speeds of price adjustment for thirty one commodities exported and fifty five commodities imported. Speeds of price adjustment differ significantly by industry. The speeds of price adjustment depend negatively on industry-wide stock returns (as a measure of the discount rate) as expected from the theory, but are insignificantly related to industry concentration (as a measure of the slope of the demand curve). Further, the speed of price adjustment relates positively to the price response to exchange rate changes as expected from the theory. Price adjustment in export industries is significantly faster than price adjustment in import industries which may be explained if foreign firms face higher price adjustment cost.
Ran, Qiming, "Exchange rate volatility and dynamic trade pricing under costly adjustment." (1996). Graduate Theses, Dissertations, and Problem Reports. 9626.