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Exchange Rates, Cross-border Travel, And Retailers: Theory And Empirics

Author

Listed:
  • Jen Baggs

    (University of Victoria)

  • Beverly Lapham

    ()

  • Loretta Fung

    (National Tsing Hua University)

Abstract

This paper provides a theoretical and empirical analysis of the effects of nominal exchange rate movements on cross-border travel by consumers and on retail firms' sales. We develop a search-theoretic model of price-setting heterogeneous retailers and traveling consumers who face nominal exchange rate shocks. These exchange rate shocks act as both a supply side shock for retailers though imported input prices and a demand side shock though their effect on the propensity for consumers to cross the border and shop at foreign retail stores. The model provides predictions regarding relationships between firm and regional characteristics and the magnitude of the effects of nominal exchange rate fluctuations and resulting cross-border travel activity on retailers' sales. We use our theoretical framework to motivate an empirical methodology applied to Canadian firm and consumer level data from 1987 to 2007. Our findings indicate that an appreciation of the Canadian dollar substantially increases cross border travel which in turn has a significant negative effect on the sales of Canadian retailers. These effects diminish with the distance of the retailer from the border and with the shopping opportunities available at relevant US destinations. Using counterfactual experiments, we quantify the effects of more restrictive border controls after September 2001 which discouraged cross-border trips and reduced retailer losses from cross-border shopping as well as the effects of increased duty free allowances which raised cross-border trips and reduced retailer sales.

Suggested Citation

  • Jen Baggs & Beverly Lapham & Loretta Fung, 2015. "Exchange Rates, Cross-border Travel, And Retailers: Theory And Empirics," Working Paper 1351, Economics Department, Queen's University.
  • Handle: RePEc:qed:wpaper:1351
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    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1351.pdf
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    References listed on IDEAS

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    Cited by:

    1. Friberg, Richard & Steen, Frode & Ulsaker, Simen A., 2018. "Hump-shaped cross-price effects and the extensive margin in cross-border shopping," Discussion Paper Series in Economics 20/2019, Norwegian School of Economics, Department of Economics, revised 23 Sep 2019.
    2. Beverly Lapham & Ayman Mnasri, 2019. "Exchange Rate Pass-Through: A Competitive Search Approach," Working Paper 1418, Economics Department, Queen's University.
    3. Piera Bello, 2017. "Exchange rate fluctuations and border crossings: evidence from the Swiss-Italian border," IdEP Economic Papers 1701, USI Università della Svizzera italiana.

    More about this item

    Keywords

    International Price Differences; Cross-Border Shopping; Firm Dynamics; Exchange Rate Pass-Through;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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