EXCHANGE RATE PASS-THROUGH UNDER FIRMS’ CAPACITY COMMITMENT

This research develops an exchange rate pass- through model, that centers on the firms''commitment in capacity to ‘price to market'' (PTM) and firms'' strategic moves in the form of a two-stage game. An econometric evaluation of the exchange rate pass-through model is also conducted to explain PTM empirically by applying the factors outlined by our model. The present research attempts the following: (i) the development of a simple two-period model of exchange rate pass-through under uncertainty in the absence of firms'' capacity commitment, and (ii) the development of a simple two-period model of exchange rate pass-through under uncertainly in the presence of firms'' capacity commitment on the basis of recent developments in industrial organization theory: Dixit (1980), Eaton and Ware (1987) and Jean Tirole (1991) and (iii) the formulation of the error correction models of the export prices of five export industries in Malaysia. The related areas include local-currency pring of exports, currency donimatation of exports and exchange rate pass-through.