Exchange Rate Volatility and International Prices / Robert C. Feenstra, Jon D. Kendall.

Format:

Book

Author/Creator:

Feenstra, Robert C.

Contributor:

National Bureau of Economic Research.

Kendall, Jon D.

Series:

Working Paper Series (National Bureau of Economic Research) no. w3644.

NBER working paper series no. w3644

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1991.

Summary:

We examine how exchange rate volatility affects exporter's pricing decisions in the presence of optimal forward covering. By taking account of forward covering, we are able to derive an expression for the risk premium in the foreign exchange market, which is then estimated as a generalized ARCH model to obtain the time-dependent variance of the exchange rate. Our theory implies a connection between the estimated risk premium equation, and the influence of exchange rate volatility on export prices. In particular, we argue that if there is no risk premium, then exchange rate variance can only have a negative impact on export prices. In the presence of a risk premium, however, the effect of exchange rate variance on export prices is ambiguous, and may be statistically insignificant with aggregate data. These results are supported using data on aggregate U.S. imports and exchange rates of the dollar against the pound. yen and mark.

Notes:

Print version record

March 1991.