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

Author

Listed:
  • Giancarlo Corsetti
  • Meredith Crowley
  • Lu Han

Abstract

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.

Suggested Citation

  • Giancarlo Corsetti & Meredith Crowley & Lu Han, 2020. "Invoicing and Pricing-to-market: Evidence on international pricing by UK exporters," Working Papers 202007, University of Liverpool, Department of Economics.
  • Handle: RePEc:liv:livedp:202007
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    File URL: https://www.liverpool.ac.uk/media/livacuk/schoolofmanagement/research/economics/Invoicing,and,Pricing,to,market.pdf
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    References listed on IDEAS

    as
    1. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2008. "High exchange-rate volatility and low pass-through," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1113-1128, September.
    2. Auer, Raphael A. & Schoenle, Raphael S., 2016. "Market structure and exchange rate pass-through," Journal of International Economics, Elsevier, vol. 98(C), pages 60-77.
    3. Devereux, Michael B. & Engel, Charles & Storgaard, Peter E., 2004. "Endogenous exchange rate pass-through when nominal prices are set in advance," Journal of International Economics, Elsevier, vol. 63(2), pages 263-291, July.
    4. Gita Gopinath & Emine Boz & Camila Casas & Federico J. Díez & Pierre-Olivier Gourinchas & Mikkel Plagborg-Møller, 2020. "Dominant Currency Paradigm," American Economic Review, American Economic Association, vol. 110(3), pages 677-719, March.
    5. Goldberg, Linda S. & Tille, Cédric, 2008. "Vehicle currency use in international trade," Journal of International Economics, Elsevier, vol. 76(2), pages 177-192, December.
    6. Emine Boz & Gita Gopinath & Mikkel Plagborg-Møller, 2019. "Dollar Invoicing and the Heterogeneity of Exchange Rate Pass-Through," AEA Papers and Proceedings, American Economic Association, vol. 109, pages 527-532, May.
    7. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
    8. Mary Amiti & Oleg Itskhoki & Jozef Konings, 2019. "International Shocks, Variable Markups, and Domestic Prices," Review of Economic Studies, Oxford University Press, vol. 86(6), pages 2356-2402.
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    10. Matteo Maggiori & Brent Neiman & Jesse Schreger, 2019. "The Rise of the Dollar and Fall of the Euro as International Currencies," AEA Papers and Proceedings, American Economic Association, vol. 109, pages 521-526, May.
    11. Chung, Wanyu, 2016. "Imported inputs and invoicing currency choice: Theory and evidence from UK transaction data," Journal of International Economics, Elsevier, vol. 99(C), pages 237-250.
    12. 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.
    13. Devereux, Michael B. & Dong, Wei & Tomlin, Ben, 2017. "Importers and exporters in exchange rate pass-through and currency invoicing," Journal of International Economics, Elsevier, vol. 105(C), pages 187-204.
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    exchange rates; pass through; law of one price; markup elasticity; vehicle currency; dominant currency; firm level data;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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