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Importers, exporters, and exchange rate disconnect

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  • Mary Amiti
  • Oleg Itskhoki
  • Jozef Konings

Abstract

Large exporters are simultaneously large importers. In this paper, we show that this pattern is key to understanding low aggregate exchange rate pass-through as well as the variation in pass-through across exporters. First, we develop a theoretical framework that combines variable markups due to strategic complementarities and endogenous choice to import intermediate inputs. The model predicts that firms with high import shares and high market shares have low exchange rate pass-through. Second, we test and quantify the theoretical mechanisms using Belgian firm-product-level data with information on exports by destination and imports by source country. We confirm that import intensity and market share are the prime determinants of pass-through in the cross-section of firms. A small exporter with no imported inputs has a nearly complete pass-through of over 90 percent, while a firm at the 95th percentile of both import intensity and market share distributions has a pass-through of 56 percent, with the marginal cost and markup channels playing roughly equal roles. The largest exporters are simultaneously high-market-share and high-import-intensity firms, which helps explain the low aggregate pass-through and exchange rate disconnect observed in the data.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 586.

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Date of creation: 2012
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Handle: RePEc:fip:fednsr:586

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Keywords: Foreign exchange rates ; Exports ; Imports;

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Citations

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Cited by:
  1. Raphael A Auer & Aaron Mehrotra, 2014. "Trade linkages and the globalisation of inflation in Asia and the Pacific," BIS Working Papers 447, Bank for International Settlements.
  2. Kwan Yong Lee & Kanda Naknoi, 2014. "Exchange Rates, Borrowing Costs and Exports: Firm-Level Evidence," Working papers 2014-18, University of Connecticut, Department of Economics.
  3. Natalie Chen & Luciana Juvenal, 2014. "Quality, Trade, and Exchange Rate Pass-Through," IMF Working Papers 14/42, International Monetary Fund.
  4. Stefania Garetto, 2014. "Firms’ Heterogeneity and Incomplete Pass-Through," Boston University - Department of Economics - Working Papers Series WP2014-006, Boston University - Department of Economics.
  5. Olivier de Bandt & Tovonony Razafindrabe, 2014. "Does nominal rigidity mislead our perception of the exchange rate passthrough?," Working Papers 2014-576, Department of Research, Ipag Business School.
  6. Olivier de Bandt & Tovonony Razafindrabe, 2014. "Does nominal rigidity mislead our perception of the exchange rate pass-through?," EconomiX Working Papers 2014-36, University of Paris West - Nanterre la Défense, EconomiX.

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