A unified framework for analysing price interdependence, innovative activity and exchange rate pass-through

- We present an international oligopoly model.
- The model endogenises price and innovation decisions of foreign and domestic firms.
- The paper introduces process innovation in the exchange rate pass-through literature.
- Innovative activity is an important determinant of pass-through.

This paper develops an international oligopoly model in which domestic and foreign firms simultaneously choose their price and innovation strategies under the assumption of non-zero conjectural variations in relation to their competitors' price changes. The model captures the links between the exchange rate, foreign and domestic firms' prices and investment in process innovation and provides a unified framework for analysing exchange rate pass-through.