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Pricing-to-market, currency invoicing and exchange rate pass-through to producer prices

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  • Cao, Shutao
  • Dong, Wei
  • Tomlin, Ben

Abstract

In this paper, we examine producer prices to shed light on a number of outstanding issues in the understanding of price adjustment in the face of fluctuating exchange rates. First, we provide results that link two closely related literatures on firm characteristics and exchange rate pass-through, and currency of invoicing and pass-through. We show that there is significant within- and across-industry heterogeneity in the currency of invoice of exports of Canadian goods to the U.S. and, further, in the degree of pass-through to producer prices. Next, we exploit the fact that we observe firms that sell the same good to both the domestic and export markets, often in different currencies, to difference out the common marginal cost component of the prices. This allows us to relate markups to exchange rate movements and we find evidence that pricing-to-market is most prominent when firms are setting export prices in U.S. dollars.

Suggested Citation

  • Cao, Shutao & Dong, Wei & Tomlin, Ben, 2015. "Pricing-to-market, currency invoicing and exchange rate pass-through to producer prices," Journal of International Money and Finance, Elsevier, vol. 58(C), pages 128-149.
  • Handle: RePEc:eee:jimfin:v:58:y:2015:i:c:p:128-149
    DOI: 10.1016/j.jimonfin.2015.08.004
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    Cited by:

    1. Tomlin, Ben, 2014. "Exchange rate fluctuations, plant turnover and productivity," International Journal of Industrial Organization, Elsevier, vol. 35(C), pages 12-28.
    2. Gerardo Licandro & Miguel Mello, 2017. "Foreign Currency Invoicing of Domestic Transactions as a Hedging Strategy Theory and Evidence for Uruguay," Documentos de trabajo 2017004, Banco Central del Uruguay.
    3. Yuriy Gorodnichenko & Oleksandr Talavera, 2017. "Price Setting in Online Markets: Basic Facts, International Comparisons, and Cross-Border Integration," American Economic Review, American Economic Association, vol. 107(1), pages 249-282, January.
    4. Lewis, Logan T., 2014. "Exports versus multinational production under nominal uncertainty," Journal of International Economics, Elsevier, vol. 94(2), pages 371-386.
    5. Chen, Natalie & Chung, Wanyu & Novy, Dennis, 2018. "Vehicle Currency Pricing and Exchange Rate Pass-Through," CEPR Discussion Papers 13085, C.E.P.R. Discussion Papers.
    6. Sinyakov, A. & Chernyadyev, D. & Sapova, A., 2019. "Estimating the Exchange Rate Pass-Through Effect on Producer Prices of Final Products Based on Micro-Data of Russian Companies," Journal of the New Economic Association, New Economic Association, vol. 41(1), pages 128-157.
    7. Shutao Cao & Wei Dong, 2019. "Production Networks and the Propagation of Commodity Price Shocks," 2019 Meeting Papers 612, Society for Economic Dynamics.
    8. Jorge González & Eduardo Saucedo, 2018. "Traspaso Depreciación-Inflación en México: Análisis de Precios al Consumidor y Productor," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 13(4), pages 525-545, Octubre-D.
    9. Nicholas Li, 2014. "Sticker Shock: The Causes of the Canada-US Price Differential," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 409, May.
    10. Salamat Ali, 2017. "Exchange Rate Effects on Agricultural Exports: Firm-level Evidence from Pakistan," Discussion Papers 2017-09, University of Nottingham, GEP.
    11. Miguel Mello, 2017. "Derivatives and Exchange Rate Hedging Strategies in Uruguayan Firms," Documentos de trabajo 2017005, Banco Central del Uruguay.
    12. Mohammad Naim Azimi, 2016. "Assessing the Exchange Rate Volatility as an External Shock to Chinese Economy," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(5), pages 277-285, May.
    13. Angela Acocella & Chris Caplice & Yossi Sheffi, 2022. "The end of 'set it and forget it' pricing? Opportunities for market-based freight contracts," Papers 2202.02367, arXiv.org.
    14. Ben Tomlin & Loretta Fung, 2015. "Exchange Rate Movements and the Distribution of Productivity," Review of International Economics, Wiley Blackwell, vol. 23(4), pages 782-809, September.
    15. M Amiti & O Istkhoki & Joep Konings, 2016. "International shocks and domestic prices: how large are strategic complementarities?," Working Papers of Department of Economics, Leuven 546424, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    16. El-Shagi, Makram & Zhang, Lin, 2016. "Macroeconomic trade effects of vehicle currencies: Evidence from 19th century China," IWH Discussion Papers 23/2016, Halle Institute for Economic Research (IWH).
    17. Rose Cunningham & Christian Friedrich & Kristina Hess & Min Jae Kim, 2017. "Understanding the Time Variation in Exchange Rate Pass-Through to Import Prices," Discussion Papers 17-12, Bank of Canada.

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    More about this item

    Keywords

    Exchange rate; Price setting; Micro data;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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