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A new approach to tests of pricing-to-market

Author

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  • Byrne, Joseph P.
  • Kortava, Ekaterina
  • MacDonald, Ronald

Abstract

This study proposes a new approach to tests of pricing-to-market, which defines the responsiveness of export prices to currency movements. Pricing-to-market parameters may be susceptible to time variation, and we account for this in a novel theoretical and empirical contribution to the literature. We extend the benchmark model of pricing-to-market to account for instability in the relationship between export prices and exchange rates. Moreover, using an empirical methodology robust to parameter instability, we examine the forecasting performance of a pricing-to-market model. In doing so we apply a selection of model mis-specification tests robust to varying degrees of parameter evolution to recent aggregate and disaggregate UK export data. Our estimation results provide strong evidence of pricing-to-market and the instability in the response of export prices to exchange rate fluctuations.

Suggested Citation

  • Byrne, Joseph P. & Kortava, Ekaterina & MacDonald, Ronald, 2013. "A new approach to tests of pricing-to-market," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 654-667.
  • Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:654-667
    DOI: 10.1016/j.jimonfin.2012.06.001
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    2. Akash Issar & Poornima Varma, 2016. "Are Indian rice exporters able to price discriminate? Empirical evidence for basmati and non-basmati rice," Applied Economics, Taylor & Francis Journals, vol. 48(60), pages 5897-5908, December.

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    More about this item

    Keywords

    Exchange rate; Forecasting; Parameter instability; Pricing-to-market;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F3 - International Economics - - International Finance

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