The pass-through from depreciation to inflation: Chile 1986-2001

A microeconomic model of imperfect Cournot competition is used to derive an explicit endogenous relationship between price level and the nominal exchange rate. We obtain a mark-up that varies endogenously with consumer real income. Using the model, the estimated pass-through –namely the impact of devaluation on inflation– ranges between 9-11% in the short run and between 21-32% in the long run for the period 1986-2001. However, the data supports a structural change in 1991, after which the pass-through coefficient declines significantly. Moreover, contrary to conventional wisdom, we find no evidence of procyclical pass-through.Utilizando un modelo microfundado de competencia oligopolística a la Cournot, se deriva una relación explícita entre el nivel de precios agregados y el tipo de cambio nominal. De esta forma se obtiene un precio cuyo margen sobre el costo marginal varía en forma endógena con el ingreso real de los consumidores, abandonando los modelos ad hoc usuales en la literatura de traspaso. Usando este marco teórico el coeficiente de traspaso estimado, esto es, el impacto de la devaluación cambiaria en la inflación doméstica, alcanza entre 9% y 11% en el corto plazo, y entre 21% y 32% en el largo plazo para Chile en el período 1986-2001. Contrario a la creencia generalizada no se encontró evidencia de un traspaso procíclico. Los datos apoyan la existencia de un cambio estructural en 1991, después del cual los coeficientes de traspaso se reducen significativamente desde valores cercanos al 20% hasta estimaciones que se ubican en el tramo entre 5% y 7%

Structural Estimation of Price Adjustment Costs in the European Car Market

Exchange rate pass-through literature identifies an important delay in price responses, especially in differentiated products. Using the methodology of Bajari, Benkard and Levin (2007), I estimate the structural price adjustment cost consistent with this fact in the European car market. My approach differs from previous work in that my framework allows me greater flexibility in estimating dynamic games. My main result is that relatively small adjustment costs rationalize the observed inertia in car prices. Intuitively, forward looking price setters face an autocorrelated economic environment (like the nominal exchange rates, GDP and wages) such that just a small cost of repricing justify the persistent prices in the European car market. Additionally, my estimates stress a market-specific heterogeneity in price stickiness suggesting a new dimension of pricing to market behavior

The pass-through from depreciation to inflation: Chile 1986-2001

A microeconomic model of imperfect Cournot competition is used to derive an explicit endogenous relationship between price level and the nominal exchange rate. We obtain a mark-up that varies endogenously with consumer real income. Using the model, the estimated pass-through –namely the impact of devaluation on inflation– ranges between 9-11% in the short run and between 21-32% in the long run for the period 1986-2001. However, the data supports a structural change in 1991, after which the pass-through coefficient declines significantly. Moreover, contrary to conventional wisdom, we find no evidence of procyclical pass-through.Utilizando un modelo microfundado de competencia oligopolística a la Cournot, se deriva una relación explícita entre el nivel de precios agregados y el tipo de cambio nominal. De esta forma se obtiene un precio cuyo margen sobre el costo marginal varía en forma endógena con el ingreso real de los consumidores, abandonando los modelos ad hoc usuales en la literatura de traspaso. Usando este marco teórico el coeficiente de traspaso estimado, esto es, el impacto de la devaluación cambiaria en la inflación doméstica, alcanza entre 9% y 11% en el corto plazo, y entre 21% y 32% en el largo plazo para Chile en el período 1986-2001. Contrario a la creencia generalizada no se encontró evidencia de un traspaso procíclico. Los datos apoyan la existencia de un cambio estructural en 1991, después del cual los coeficientes de traspaso se reducen significativamente desde valores cercanos al 20% hasta estimaciones que se ubican en el tramo entre 5% y 7%

Structural estimation of price adjustment costs in the European car market

I estimate a dynamic model of international multiproduct manufacturers who set prices in different currencies facing price adjustment costs. The main contribution of this paper is to characterize price adjustment costs that are consistent with the observed price dynamics in the autocorrelated and heterogeneous European car market. Using the methodology developed by Bajari, Benkard, and Levin (2007), I found three main results for the estimated cost structure . First, I rationalize the incomplete degree of exchange rate pass-through with destination-currency costs of a third of total costs. Second, there is no need for large price adjustment costs to rationalize the large degree of price inertia. Intuitively, in a highly autocorrelated economic environment a small adjustment costs can rationalize the persistent prices observed. Third, my estimates of price adjustment cost seem to be producer-destination specific since a uniform cost structure is not consistent with the pricing behavior observed whilst accounting for different sources of heterogeneity. Hence I identify an unexplored temporal dimension of “pricing-to-market” behavior, which is the practice of setting prices differently across segmented markets

The pass-through from depreciation to inflation: Chile 1986-2001

A microeconomic model of imperfect Cournot competition is used to derive an explicit endogenous relationship between price level and the nominal exchange rate. We obtain a mark-up that varies endogenously with consumer real income. Using the model, the estimated pass-through �namely the impact of devaluation on inflation� ranges between 9-11% in the short run and between 21- 32% in the long run for the period 1986-2001. However, the data supports a structural change in 1991, after which the pass-through coefficient declines significantly. Moreover, contrary to conventional wisdom, we find no evidence of procyclical pass-through.Utilizando un modelo microfundado de competencia oligopolística a la Cournot, se deriva una relación explícita entre el nivel de precios agregados y el tipo de cambio nominal. De esta forma se obtiene un precio cuyo margen sobre el costo marginal varía en forma endógena con el ingreso real de los consumidores, abandonando los modelos ad hoc usuales en la literatura de traspaso. Usando este marco teórico el coeficiente de traspaso estimado, esto es, el impacto de la devaluación cambiaria en la inflación doméstica, alcanza entre 9% y 11% en el corto plazo, y entre 21% y 32% en el largo plazo para Chile en el período 1986-2001. Contrario a la creencia generalizada no se encontró evidencia de un traspaso procíclico. Los datos apoyan la existencia de un cambio estructural en 1991, después del cual los coeficientes de traspaso se reducen significativamente desde valores cercanos al 20% hasta estimaciones que se ubican en el tramo entre 5% y 7%

Home bias, structural demands and the European car market

Home bias in consumption is the widespread phenomenon of consumers choosing a bundle of tradable goods with a large domestic component. The home bias can be explained by various reasons, with biased preferences as a natural common feature to all of them. The empirical relevance of this preference based explanation of home bias is explored for the European car market using the framework of Berry, Levinsohn, and Pakes (1995). In contrast to the previous nested logit literature, BLP imposes less structure on the demand elasticities differences between domestic and foreign producers whilst controlling for price endogeneity, unobserved characteristics and consumer heterogeneity. I find that including home bias in preferences explains a remarkable large fraction of the actual home bias and it is well captured by a large fixed effect or "utility shifter". Contrary to the assumptions of the previous nested logit estimations, domestic producers do not face less elastic demands in their domestic markets than foreign competitors. This result justifes mirror-symmetric preferences biased towards the home good as long as the own price elasticities remain in the same range between domestic and foreign goods

Essays on Structural Estimation in the European Car Market

This dissertation consists of two essays of structural estimation in the European car market, where the first chapter focuses on the demand side and the second chapter focuses on the supply side.In the first chapter, I incorporate home bias in a structural demand, consistent with the strong dominant position of domestic car manufacturers in Europe. I use the Berry, Levinsohn, and Pakes (1995) methodology which considers heterogeneous consumers, controls for price endogeneity, and does not impose decision nests. My estimates suggest that home bias is a key determinant of the market shares differences and is well captured by a fixed effect. Contrary to previous finding, domestic producers do not face a less sensitive demand in their domestic markets than foreign competitors, which is a crucial distinction for pricing behavior.In the second chapter, I estimate the underlying cost structure of the car manufacturers to rationalize two key features: incomplete degree of exchange rate pass-through and gradual price adjustments. Using the methodology developed by Bajari, Benkard, and Levin (2007) to estimate dynamic games, I identify structural cost parameters including destination-currency cost components and price adjustment costs. The main results are: i) the destination-currency cost component should be about 20-30% of total costs in order to rationalize the observed incomplete degree of exchange rate pass-through; ii) relatively small price adjustment costs can rationalize the observed inertia in car prices; iii) there are heterogeneous price adjustment costs at producer-market level suggesting a new dimension of pricing to market behavior; and iv) in this particular dynamic environment, there is a positive relationship between price elasticities and markups

The pass-through from depreciation to inflation: Chile 1986-2001

A microeconomic model of imperfect Cournot competition is used to derive an explicit endogenous relationship between price level and the nominal exchange rate. We obtain a mark-up that varies endogenously with consumer real income. Using the model, the estimated pass-through –namely the impact of devaluation on inflation– ranges between 9-11% in the short run and between 21-32% in the long run for the period 1986-2001. However, the data supports a structural change in 1991, after which the pass-through coefficient declines significantly. Moreover, contrary to conventional wisdom, we find no evidence of procyclical pass-through.Exchange rate, Devaluation, Pass-through, Inflation, Endogenous Mark-up, Oligopolistic Cournot Competition.