Export Performance, Invoice Currency and Heterogeneous Exchange Rate Pass‐Through

25 Pages Posted: 10 Feb 2015

See all articles by Richard Fabling

Richard Fabling

Motu Economic and Public Policy Research Trust

Lynda Sanderson

Government of New Zealand - Treasury

Multiple version iconThere are 2 versions of this paper

Date Written: February 2015

Abstract

Using comprehensive, shipment‐level merchandise trade data for a small, open economy, we examine heterogeneity in exporters' exchange rate pass‐through (ERPT) behaviour. We draw together two recent studies of ERPT, linking invoice currency decisions and firm performance to heterogeneity in ERPT. Like these studies, we find that the short‐run reaction of export unit values to exchange rate fluctuations is significantly related to both invoice currency choice and exporter characteristics when these are analysed separately. However, we then show that when the two factors are jointly accounted for, the role of exporter characteristics largely disappears. That is, some firm types are more inclined to invoice in the producer currency, while others use either the local or a vehicle currency. In the short run, this translates into differences in exchange rate pass‐through because of price rigidity in the invoice currency. Firm characteristics do not have an independent impact on pass‐through beyond their effect on currency composition. Differences across invoice currencies diminish over time, but do not disappear, as prices adjust to reflect bilateral exchange rate movements.

Suggested Citation

Fabling, Richard Blaikie and Sanderson, Lynda, Export Performance, Invoice Currency and Heterogeneous Exchange Rate Pass‐Through (February 2015). The World Economy, Vol. 38, Issue 2, pp. 315-339, 2015. Available at SSRN: https://ssrn.com/abstract=2562684 or http://dx.doi.org/10.1111/twec.12198

Richard Blaikie Fabling (Contact Author)

Motu Economic and Public Policy Research Trust ( email )

Level 1, 93 Cuba Street
P.O. Box 24390
Wellington, 6142
New Zealand

Lynda Sanderson

Government of New Zealand - Treasury ( email )

No. 1, The Terrace
Wellington, 6011
New Zealand

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