Non-Price Competition and Exchange Rate Pass-Through

Abstract

A substantial body of empirical works document that exchange rate pass-through to con- sumer prices is incomplete. This evidence has cast doubts on the ability of flexible exchange rates to generate expenditure switching. In a dynamic stochastic discrete-time duopoly game, non-price competition among firms endogenously originates a degree of exchange rate pass-through close to zero together with an expenditure switching effect stronger than in the standard models.