Invoicing and Pricing-to-Market: A Study of Price and Markup Elasticities of UK Exporters

In this paper, we provide novel micro evidence that the currency in which exports and imports are invoiced is a good proxy for the currency in which firms set prices. Using detailed data on UK customs transactions, we document that destination-specific markup adjustment is substantial only for export shipments which are invoiced in the destination market's currency, consistent with the view that firms invoicing in local currency price to market. Conversely, we find no destination-specific markup adjustments by firms that invoice a shipment in either their own currency or a vehicle currency, consistent with a firm setting one price either in their own or in a vehicle currency. However, we also document that, while the aggregate shares of invoicing currencies for the UK's exports and imports are stable over time, there is substantial heterogeneity at the firm-product-destination level. A firm's shipments of the same product to the same destination are often invoiced in multiple currencies, with a non-trivial degree of switching from one invoicing currency to another within a twelve-month period. This is more pronounced for firms that are multi-product and serve several destinations, pointing to a potentially important margin of adjustment so far understudied in the literature.