Who bears the cost of a change in the exchange rate? The case of imported beer

Abstract: This paper quantifies the welfare effects of a change in the nominal exchange rate using the example of the beer market. I estimate a structural econometric model that makes it possible to compute manufacturers' and retailers' pass-through of a nominal exchange-rate change, without observing wholesale prices or firms' marginal costs. I conduct counterfactual experiments to quantify how the change affects domestic and foreign firms' profits and domestic consumer welfare. The counterfactual experiments show that foreign manufacturers bear more of the cost of an exchange-rate change than do domestic consumers, domestic manufacturers, or a domestic retailer. The model can be applied to other markets and can serve as a tool to assess the welfare effects of various exchange-rate policies.

Keywords: beer; pricing-to-market; local-currency pricing; cross-border vertical contracts; law of one price; exchange-rate pass-through; market segmentation;

JEL Classification: D40; F14; F3; F4; L60; L16;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2004-02-01

Number: 179

Pages: 65 pages

Note: For a published version of this report, Rebecca Hellerstein, "Who Bears the Cost of a Change in the Exchange Rate? Pass-through Accounting for the Case of Beer," Journal of International Economics 76, no. 1 (September 2008): 14-32.