NBER WORKING PAPER SERIES PASS-THROUGH OF EXCHANGE.pdf

NBER WORKING PAPER SERIES PASS-THROUGH OF EXCHANGE RATES AND PURCHASING POWER PARiTY Robert C. Feenstra Jon D. Kendall Working Paper No. 4842 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 August 1994 The authors thank Ken Froot and Carol Osler for very helpful comments on earlier versions of this paper, and Andrew Rose and Steve Sheifrin for comments on this draft. This paper is part of NBERs research program in International Trade and Investment Any opinions expressed are those of the authors and not those of the National Bureau of Economic Research. 1994 by Robert C. Feenstra and Jon D. Kendall. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including notice, is given to the source. NBER Working Paper #4842 August 1994 PASS-THROUGH OF EXCHANGE RATES AND PURCHASING POWER PARITY ABSTRACT In this paper we develop and test two hypotheses about purchasing power parity (PPP) derived from the pricing behavior of profit-maximizing, exporting firms. The first is that changes in the price of traded goods relative to domestic substitutes, due to partial pass-through of exchange rates, will affect the PPP relation. The second is that P