Forward-Looking Exporters and Exchange Rate Pass-Through
25 Pages Posted: 7 Mar 2015
Date Written: March 1, 2015
Abstract
This paper shows that the pricing behavior of exporters exhibits a "forward-looking" nature due to the existence of sticky prices. It offers a channel by which the expectations of future exchange rates can affect current export prices at both the firm and product level. By exploring bilateral trade data between the United States and China that are reported by both countries, combined with forward exchange rates, we find that export prices significantly respond to forward premiums at the firm-product level. At the product level, not only current (and past) exchange rate fluctuations but also future exchange rate changes are found to pass-through into import prices. These findings provide a new perspective that reveals the "micro-foundation" for the explanation of the phenomenon of partial exchange rate pass-through.
Keywords: Forward-looking; Price adjustment; Exchange rate pass-through; Sticky price
JEL Classification: F31, F14, F4
Suggested Citation: Suggested Citation