Abstract

A quantity adjustment cost model is developed in an international trade context, along the lines proposed by Krugman (1987). The model implies that prices adjust dynamically to exchange rate fluctuations. The price adjustment speed is determined as a function of foreign demand responsiveness, the appropriate discount rate, and an adjustment cost parameter. Pass-through is incomplete and increases with the speed of price adjustment. Empirical analysis finds the speed of price adjustment from the time series by industry and then in a cross-sectional regression relates the obtained adjustment speeds to their theoretical determinants. Results tentatively support the quantity adjustment cost view.