Forward-Looking Exporters and Exchange Rate Pass-Through

25 Pages Posted: 7 Mar 2015

See all articles by Yao Amber Li

Yao Amber Li

Hong Kong University of Science and Technology - School of Business and Management, Department of Economics; HKUST IEMS (Institute for Emerging Market Studies)

Chen Zhao

Hong Kong University of Science & Technology (HKUST)

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

Li, Yao Amber and Zhao, Chen, Forward-Looking Exporters and Exchange Rate Pass-Through (March 1, 2015). Available at SSRN: https://ssrn.com/abstract=2574242 or http://dx.doi.org/10.2139/ssrn.2574242

Yao Amber Li (Contact Author)

Hong Kong University of Science and Technology - School of Business and Management, Department of Economics; HKUST IEMS (Institute for Emerging Market Studies) ( email )

Department of Economics, Hong Kong U of Sci&Tech
Clear Water Bay, Kowloon, Hong Kong SAR, China
Kowloon
Hong Kong

HOME PAGE: http://yaoli.people.ust.hk/

Chen Zhao

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

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