Manufacturers selling in foreign markets often do not completely pass on the effects of fluctuations in exchange rates to the prices of their products. Our paper addresses this puzzle and studies the effects of the international distribution channel on exchange rate pass-through. We develop an exchange rate pass-through model that takes into account the role of an intermediary between a domestic manufacturer and its consumers in a foreign market. We find that the magnitude of the pass-through depends on the presence of an incentive problem in the distribution channel. When there is no incentive problem, pass-through is complete; however, when there is an incentive problem, pass-through depends on various characteristics of the intermediary and the market setting. Our analysis underscores the importance of considering the role of international distribution channels and suggests directions for further work on exchange rate pass-through.
JEL classification: F23, D30, D82
Desiraju is an assistant professor in the Department of Business Administration at the University of Delaware. Shrikhande is a visiting scholar in the research department of the Federal Reserve Bank of Atlanta and an assistant professor of finance at the DuPree School of Management at the Georgia Institute of Technology. Earlier versions of this paper were presented at the 1995 Financial Management Association meetings, the Atlanta Finance Workshop, and the University of Delaware Workshop on International Business Issues. The authors thank the attendees at these meetings as well as Antonio Mello, David Nachman, Tom Noe, and David Sappington for their detailed comments. The authors also thank two anonymous referees whose many suggestions helped greatly in completing this version of the paper. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions of substance to Milind Shrikhande, Assistant Professor of Finance, The DuPree School of Management, Georgia Institute of Technology, 755 Ferst Drive, Atlanta, Georgia 30332-0520, 404/894-5109, firstname.lastname@example.org, or Research Department, Federal Reserve Bank of Atlanta, 104 Marietta Street, N.W., Atlanta, Georgia 30303-2713, 404/498-8974, email@example.com.
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