Currency Appreciation, Distance to Border and Price Changes: Evidence from Swiss Retail Prices

CEPR Discussion Paper No. DP15019

40 Pages Posted: 23 Jul 2020 Last revised: 16 Aug 2020

See all articles by Reto Foellmi

Reto Foellmi

University of St. Gallen - Swiss Institute for International Economics and Applied Economic Research

Adrian Jäggi

University of St. Gallen

Fabain Schnell

Swiss National Bank

Date Written: July 2020

Abstract

How does the exchange rate affect the way that firms adjust their prices? We use quarterly firm and product price data, underlying the Swiss sectoral consumer price index. The data allows us to trace the pricing decisions of the identified firm over time and as a function of the distance to the border distance. The appreciation of the Swiss franc results in an increase in the probability of both positive and negative price changes. When a firm is more closely located to the border, the probability of a negative price change is higher. On the intensive margin, we document that an appreciation of the Swiss Franc leads to price reductions, and that this effect is stronger the closer a firm is located to the nearest border. However, for firms located far away from the border, an appreciation of the Swiss Franc leads to no price reductions or even increases. We rationalise this by the relative strengths of income and substitution effects. The substitution effect dominates for firms close to the border, while the income effect dominates for firms located further away from the border.

Keywords: Distance to Border, Exchange rate, Price Setting Behavior of Firms

JEL Classification: E30, E31

Suggested Citation

Foellmi, Reto and Jäggi, Adrian and Schnell, Fabain, Currency Appreciation, Distance to Border and Price Changes: Evidence from Swiss Retail Prices (July 2020). CEPR Discussion Paper No. DP15019, Available at SSRN: https://ssrn.com/abstract=3650134

Reto Foellmi (Contact Author)

University of St. Gallen - Swiss Institute for International Economics and Applied Economic Research ( email )

Bodanstrasse 8
St. Gallen, 9000
Switzerland
+41-71-224-2269 (Phone)
+41-71-224-2298 (Fax)

Adrian Jäggi

University of St. Gallen ( email )

Bodanstrasse 8
SIAW-HSG
St.Gallen, 9000
Switzerland

Fabain Schnell

Swiss National Bank ( email )

Research
Fraumuensterstr. 8
Zuerich, 8022
Switzerland

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