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Previous title: “Arm’s-Length Transactions as a Source of Incomplete Cross-Border Transmission: The Case of Autos”
April 2006 Number 251 Revised June 2010
JEL classification: F14, F3, F4
Authors: Rebecca Hellerstein and Sofia Berto Villas-Boas
A large share of international trade occurs through intrafirm transactions. We show that this common cross-border organization of the firm has implications for the well-documented incomplete transmission of shocks across such borders. We present new evidence of an inverse relationship between a firm’s outsourcing of inputs and its rate of exchange rate pass-through. We then develop a structural econometric model with final assemblers and upstream parts suppliers to quantify how firms’ organization of their activities across national borders affects their pass-through behavior.