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Multi-product exporters, variable markups and exchange rate fluctuations

  • Mauro Caselli

    ()

    (School of Economics, Australian School of Business, the University of New South Wales)

  • Arpita Chatterjee

    ()

    (School of Economics, Australian School of Business, the University of New South Wales)

  • Alan Woodland

    ()

    (School of Economics, Australian School of Business, the University of New South Wales)

In this paper we investigate how firms adjust markups across products in response to fluctuations in the real exchange rate. In a theoretical framework, we show that firms increase their markup and producer prices following a real depreciation and that this increase is greater for products with higher productivity, a consequence of local distribution costs. We estimate markups at the market-product-plant level using detailed panel production and cost data from Mexican manufacturing between 1994 and 2007. Exploiting variation in the real exchange rate in the aftermath of the peso crisis in December 1994, we provide robust empirical evidence that plants increase their markups and producer prices in response to a real depreciation and that within-firm heterogeneity is a key determinant of plants' response to exchange rate shocks. We also provide some evidence in favour of a local distribution cost channel of incomplete exchange rate pass-through.

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File URL: http://research.economics.unsw.edu.au/RePEc/papers/2014-15.pdf
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Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2014-15.

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Length: 31 pages
Date of creation: Mar 2014
Date of revision:
Handle: RePEc:swe:wpaper:2014-15
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