Trade integration,competition,andthedeclineinexchange-rate pass-through

Over thepast20years,U.S.importpriceshavebecomelessresponsivetotheexchange rate.Weproposethatasignificantportionofthisdeclineisaresultofincreasedtrade integration.Toillustratethiseffect,wedevelopanopeneconomyDGEmodelfeaturing demandcurveswithvariableelasticitiessothatafirm’spricingdecisiondependsonits competitors’prices.Asaresult,aforeignexporterfindsitoptimaltovaryitsmarkupin responsetoshocksthatchangetheexchangerate,insulatingimportpricesfrom exchangeratemovements.Withincreasedtradeintegration,exportershavebecome more responsivetothepricesoftheircompetitors,explainingasizeableportionofthe observeddeclineinthesensitivityofU.Simportpricestotheexchangerate