Pricing in International Markets: A 'Small Country' Benchmark

Abstract

This working paper was written by David C. Parsley (Vanderbilt University).

This study examines exchange rate pass-through in a 'small country' context. The study uses a panel of disaggregated exports from Hong Kong to its major flexible exchange rate destinations since 1992. Most existing evidence on pass-through is taken from G7 countries and finds that export prices (in the importing currency) respond less than fully to exchange rate changes. The notable exception is for exports from the United States. Existing evidence suggests that exporters from the U.S. apparently do not mitigate export prices in response to exchange rates, while other countries' exporters routinely pass-through less than 100% of exchange rate changes. This study provides a benchmark by which to interpret the puzzling behavior of U.S. export prices.

Empirically, Hong Kong's export price behavior overwhelmingly supports the competitive paradigm. In only a few cases is there evidence of less than complete pass-through by Hong Kong's exporters. The panel data set also allows an additional question to be addressed. In particular, there is no evidence of differences in pass-through across export destinations. Thus, by inference, near complete pass-through by U.S. exporters suggests similar competitive behavior.