Firm-to-firm trade frictions -> pass-through persistence matters. Import currency stickiness amplifies pass-through persistence -> relatively large substitution effect of ER despite low price effect. So in US imports, ER can offset tariffs more for quantities than it can for prices. 2/2
Post I made on X, thought I'd make on Bsky too. If the dollar appreciates a lot, dollar pricing in US imports would mean the ER can't much offset tariffs in terms of inflation. But my JMP would say it could still help offset tariffs in terms of quantity substitution (e.g supply chain disruption) 1/2
Might as well share a link to my JMP on here 🦋 Conventional wisdom says low exchange rate pass-through mutes expenditure-switching; I show the opposite! Key: given firm-to-firm trade frictions, the pass-through persistence determines substitution. drive.google.com/file/d/17EuN...
Dartmouth College, as beautiful as ever :) very cool to be back to present my job market paper at my Alma mater!
Mussa puzzle, often viewed as key evidence for monetary non-neutrality, is not due to sticky prices, but due to non-neutrality arising from segmented financial markets resulting in macroeconomic transmission via the risk premium channel www.econometricsociety.org/publications...
