Firm-to-firm relationships and the pass-through of shocks: Theory and evidence

Arbeitspapier

Economists have long suspected that firm-to-firm relationships might lower the responsiveness of prices to shocks due to the use of fixed-price contracts. Using transaction-level U.S. import data, I show that the pass-through of exchange rate shocks in fact rises as a relationship grows older. Based on novel stylized facts about a relationship's life cycle, I develop a model of relationship dynamics in which a buyer-seller pair accumulates relationship capital to lower production costs under limited commitment. The structurally estimated model generates countercyclical markups and countercyclical pass-through of shocks through variation in the economy's rate of relationship creation, which falls in recessions.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Staff Report ; No. 896

Classification and Topics

• Classification: Wirtschaft ; Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) ; Business Fluctuations; Cycles ; Empirical Studies of Trade ; Transactional Relationships; Contracts and Reputation; Networks
• Subject: prices ; exchange rate ; supply chain ; trade relationships

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Heise, Sebastian
• Event: Veröffentlichung
• (who): Federal Reserve Bank of New York
• (where): New York, NY
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/210748
• Last update: 10.03.2025, 12:03 PM CET