Currency invoicing practices, exchange rate volatility and pricing-to-market: evidence from product level data

The paper investigates the long-run relationship between exchange rate volatility and the pricing-to-market policies of international exporting firms when such firms choose between different currencies (exporters, importers or vehicle) for invoicing their trading partners. Distinctively, our analysis is conducted at the level of the product, using data from the Norwegian fishing industry. Dynamic error correction models are formulated to capture the long-run relationship between exchange rate pass-through elasticities and the different currency invoicing strategies. Exchange rate pass-through coefficients vary from 0.07 to 0.98 across products. Moreover, for a given product, pass-through coefficients vary significantly both across and within destination markets, depending upon the invoicing currency chosen. This variation is linked to nominal rigidities and exchange rate uncertainty. The findings also suggest that the choice of invoicing currency may be an important strategic variable facilitating discriminatory pricing by exporting firms. Finally, the results also corroborate theoretical predictions linking pass-through to exchange rate volatility; namely, pass-through is lower the more volatile the exchange rate.