Markets Integrity And Elasticity Of Demand Essay

Markets Integrity And Elasticity Of Demand Essay

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One of the early researches by Dornbusch (1987) concludes that market concentration, shares of domestic and foreign firms and goods substitutability and homogeneity are the factors which influence to the extent of exchange rate pass through (Dornbusch, 1987). The markets integrity and elasticity of demand are critical factors for assessment of exchange rate pass-through. By setting goods price differently according to a specific market, which actually happens in the reality, elasticity of demand on these markets defines the completeness of exchange rate pass-through. If the elasticity is constant it is complete, if demand is increasing, then it is incomplete. This concept of “price to market” was introduced by Krugman (1987) and explained the absorption of some amount of exchange rate pass-through in imperfect competition models.
The degree of openness of an economy and bias of consumption of domestic goods are also the factors which influences on degree of pass-through to consumer prices. Moreover, changes in exchange rates may influence on production prices depending on the share of imported intermediate goods and raw materials in final products of domestic firms (McCallum & Nelson, 2000) (Ambler, et al., 2003)
Denomination of predetermined prices either in foreign or in domestic currency is the factor of degree of exchange rate pass-through. If goods are priced in currency of exporting country, price discrimination and price-to-market results incomplete pass-through and deviations from LOP. Otherwise, sum of price discrimination and expectation effects results such observations. In the second case, the stochastic properties of nominal exchange rate influences on the exchange rate pass-through. (Giovannini, 1988)
The choice of...


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... Asian crisis in 1997-1998, when Asian exports were priced in US dollar. (Gagnon & Ihrig, 2004) also documented decrease of pass-through effect to consumer prices in many countries in 1990s.
Structural vector autoregressions have been used in most of the empirical studies (for instance, (McCarthy, 2000); (Hahn, 2003); (Choudhri, et al., 2005); (Faruqee, 2006)) as regression method to calculate the exchange rate pass-through and it has become quite popular methodology. Source of the shock of exchange rates was recognized as the important factor in describing price movements, and the VAR approach is useful method in this case, which allows to use several variables such as several price indices (import, export, producer and consumer prices), output gap, interest rates, oil prices, money supply. Moreover, exchange rate’s endogeneity is taken into account in VAR method.

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