IMF Economic Review

, Volume 65, Issue 3, pp 471–497 | Cite as

How Important Are Trade Prices for Trade Flows?

Article
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Abstract

US imports and exports respond little to exchange rate changes in the short run. Firms’ pricing behavior is thought central to explaining this response: If local prices do not respond to exchange rates, neither will trade flows. Sticky prices, strategic complementarities, and imported intermediates can reduce the trade response, and they are necessary to match newly available international micro price data. Using trade flow data, I test models designed to match these trade price data. Even with significant pricing frictions, the models imply a stronger trade response to exchange rates than found in the data. Moreover, despite substantial cross-sector heterogeneity, differential responses implied by the model find little to no support in the data.

JEL

F14 F31 F32 E31 

Supplementary material

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Copyright information

© International Monetary Fund 2017

Authors and Affiliations

  1. 1.Federal Reserve BoardWashingtonUSA

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