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Pricing-to-market by Brazilian Exporters: a Panel Cointegration Approach

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  • João Barata Ribeiro Blanco Barroso

Abstract

This paper investigates Brazilian exporter's pricing behavior, over the longrun, following destination specific exchange rate shocks. The panel cointegration method of Bai, Kao and Ng (2009) is shown to identify the long-run parameter of interest. The method crucially depends on identification and controlling for the common trend in prices to different countries, a trend which is structurally interpreted, like originally proposed by Kneeter (1989), as the exporter's marginal cost. We find evidence of incomplete exchange-rate pass-through in the long-run, which supports the market structure explanations of Krugman (1986), known in the literature as pricing-to-market, over contending short-run sticky-price explanations. The degree of long-run pass-through is also shown to be positively related to technological intensity in the sector, a proxy for low elasticity of substitution of varieties.

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Bibliographic Info

Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 270.

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Date of creation: Mar 2012
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Handle: RePEc:bcb:wpaper:270

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Web page: http://www.bcb.gov.br/?english

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  1. Alan Sutherland, 2002. "Incomplete Pass-Through and the Welfare Effects of Exchange Rate Variability," Discussion Paper Series, Department of Economics 200212, Department of Economics, University of St. Andrews.
  2. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
  3. Bai, Jushan & Kao, Chihwa & Ng, Serena, 2009. "Panel cointegration with global stochastic trends," Journal of Econometrics, Elsevier, vol. 149(1), pages 82-99, April.
  4. Andrew Atkeson & Ariel Burstein, 2007. "Pricing-to-market, trade costs, and international relative prices," Working Paper Series 2007-26, Federal Reserve Bank of San Francisco.
  5. Matteo Bugamelli & Roberto Tedeschi, 2008. "Pricing-to-Market and Market Structure," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 70(2), pages 155-180, 04.
  6. Abdulnasser Hatemi-J & Manuchehr Irandoust, 2004. "Is Pricing to Market Behavior a Long-Run Phenomenon? A Non-Stationary Panel Analysis," Empirica, Springer, vol. 31(1), pages 55-67, March.
  7. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
  8. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Econometric Society World Congress 2000 Contributed Papers 1504, Econometric Society.
  9. Knetter, Michael M, 1989. "Price Discrimination by U.S. and German Exporters," American Economic Review, American Economic Association, vol. 79(1), pages 198-210, March.
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