Invoicing and Pricing-to-market: Evidence on international pricing by UK exporters

Using administrative data on export transactions, we show that UK firms invoice in multiple currencies — even when shipping the same product to the same destination — and switch invoicing currencies over time. We then provide microeconometric evidence that the currency in which a cross-border sale is invoiced predicts systematic differences in exchange rate pass-through and destination-specific markup adjustment, at the granular level of firm-productdestination and time. Based on an event study around the 2016 Brexit depreciation and econometric analysis of a longer period (2010-2017), we examine the export price elasticity to the exchange rate measured in sterling to find that this is low for transactions invoiced in producer currency and comparably high for sales invoiced either in a vehicle or in the destination market currency. However, our analysis of markup elasticities reveals that firms price-to-market only when they invoice sales in the destination market currency. Altogether, our findings imply that currency movements may cause significant short-run deviations from the law of one price not only across but also within borders; these are systematically linked to the firm’s choice of invoicing currencies. Dynamically, we find that the stark differences in price changes across invoicing currencies that emerged in the aftermath of the Brexit depreciation atrophied within six quarters, as all prices came to align broadly with the weaker pound. These findings enrich our understanding of the ‘international price system’ underpinning the international transmission of shocks (Gopinath (2015)), with crucial implications for open macro modelling and policy design.