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Forward-Looking Exporters and Exchange Rate Pass-Through: A Micro-Level Investigation

Author

Listed:
  • Yao Amber Li

    () (Department of Economics, Hong Kong University of Science and Technology
    Institute for Emerging Market Studies, Hong Kong University of Science and Technology)

  • Carol Zhao Chen

    (Department of Economics, Hong Kong University of Science and Technology)

Abstract

This paper shows that the pricing behavior of exporting firms exhibits a "forward-looking" nature under sticky prices. It offers a channel by which the expectations of future exchange rates affect current prices. To seek the micro-level evidence, we adopt detailed product-level import data of the United States and firm-product-level export data of China combined with forward premiums to study the exchange rate pass-through. We find that not only current (and past) exchange rate fluctuations but also anticipated future exchange rate changes effectively pass through into current prices, suggesting a potentially important factor in help explaining incomplete exchange rate pass-through.

Suggested Citation

  • Yao Amber Li & Carol Zhao Chen, 2015. "Forward-Looking Exporters and Exchange Rate Pass-Through: A Micro-Level Investigation," HKUST IEMS Working Paper Series 2015-28, HKUST Institute for Emerging Market Studies, revised Jul 2015.
  • Handle: RePEc:hku:wpaper:201528
    as

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    File URL: http://iems.ust.hk/assets/publications/working-papers-2015/iemswp2015-28.pdf
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    References listed on IDEAS

    as
    1. Kenneth A. Froot & Jeffrey A. Frankel, 1989. "Forward Discount Bias: Is it an Exchange Risk Premium?," The Quarterly Journal of Economics, Oxford University Press, pages 139-161.
    2. Gian‐Maria Milesi‐Ferretti & Cédric Tille, 2011. "The great retrenchment: international capital flows during the global financial crisis," Economic Policy, CEPR;CES;MSH, pages 285-342.
    3. Strasser, Georg, 2013. "Exchange rate pass-through and credit constraints," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 25-38.
    4. Haichao Fan & Yao Amber Li & Stephen R. Yeaple, 2015. "Trade Liberalization, Quality, and Export Prices," The Review of Economics and Statistics, MIT Press, vol. 97(5), pages 1033-1051, December.
    5. Yii Siing Wong & Chong Mun Ho & Brian Dollery, 2012. "Impact of exchange rate volatility on import flows: the case of Malaysia and the United States," Applied Financial Economics, Taylor & Francis Journals, pages 2027-2034.
    6. Arnaud Mehl & Lorenzo Cappiello, 2009. "Uncovered Interest Parity at Long Horizons: Evidence on Emerging Economies ," Review of International Economics, Wiley Blackwell, vol. 17(5), pages 1019-1037, November.
    7. Wang, Jian, 2010. "Home bias, exchange rate disconnect, and optimal exchange rate policy," Journal of International Money and Finance, Elsevier, vol. 29(1), pages 55-78, February.
    8. Heiwai Tang & Yifan Zhang, 2012. "Exchange Rates and the Margins of Trade: Evidence from Chinese Exporters," CESifo Economic Studies, CESifo, vol. 58(4), pages 671-702, December.
    9. Devereux, Michael B. & Yetman, James, 2010. "Price adjustment and exchange rate pass-through," Journal of International Money and Finance, Elsevier, vol. 29(1), pages 181-200, February.
    10. Craig R. Parsons & Kiyotaka Sato, 2006. "Exchange Rate Pass-through and Currency Invoicing: Implications for Monetary Integration in East Asia," The World Economy, Wiley Blackwell, vol. 29(12), pages 1759-1788, December.
    11. Daniels, Joseph P. & VanHoose, David D., 2013. "Exchange-rate pass through, openness, and the sacrifice ratio," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 131-150.
    12. Li, Hongbin & Ma, Hong & Xu, Yuan, 2015. "How do exchange rate movements affect Chinese exports? — A firm-level investigation," Journal of International Economics, Elsevier, pages 148-161.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Forward-looking; Price adjustment; Exchange rate pass-through; Sticky price;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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