What is the effect of exchange rate policy on the export competitiveness of a country? To what extend can price changes in one country be passed through to a trading partner? This research exploits a novel dataset on micro level prices of imported and exported goods for the U.S. to shed light on three important questions in international macroeconomics: (i) stickiness of prices and the currency in which prices are sticky at the dock for traded goods, (ii) the puzzling decline of exchange rate pass-through that has been documented world wide in the recent decade, and (iii) measurement of the quality growth in trade and its impact on the terms of trade. Most research that attempt to look at these questions has used aggregate country or industry level data. However, to properly understand these questions, one need micro data that can be linked back to the macroeconomy. The unique data the PI has obtained allows him to do that. The PI will develop theoretical models that will be estimated with the unique data available. In particular, the decomposition of the terms of trade throws light on the evolution of the terms of trade as a country grows.
The result of this research will have important implications for our theoretical understanding of the macroeconomic impact of monetary and exchange rate policy, both domestically and internationally. It will help guide our predictions of how global trade imbalances will be resolved through the price adjustments of traded goods. Secondly, it will have implications for the microeconomic theory of price setting of firms engaged in trade, particularly for a large economy such as the U.S. The research will shed light on the particular structure and market power of large firms in setting prices in trade as well as who bears the exchange rate risk in such international transactions. The result of this result will also inform policy questions such as whether China will experience a slow down in its growth because of its terms of trade movement.
