Exchange rates and traded goods prices

This paper presents a partial equilibrium model of the determination of domestic and export prices by a monopolistic competitive firm. The model stresses the role of exchange rate uncertainty and expectations. The most important result of the analysis is that the stochastic properties of deviations from the ‘law of one price’ are crucially affected by the currency of denomination of export prices. Using data on domestic and dollar export prices of Japanese goods, I find that deviations from the ‘law of one price’ are due to exchange rate surprises, but also to price staggering and ex ante price discrimination.