Invoicing and the Dynamics of Pricing-to-Market: Evidence from UK Export Prices Around the Brexit Referendum
109 Pages Posted: 5 Nov 2018 Last revised: 4 Feb 2022
Date Written: October 2018
Abstract
We provide micro-econometric evidence that, following the large and persistent sterling depreciation after the Brexit referendum, on impact, exchange rate pass-through (ERPT) was complete for transactions invoiced in producer currency and low for sales invoiced either in a vehicle or in the destination market currency. Yet these differences strikingly narrowed within six quarters. A weaker currency did not translate into a persistent gain in price competitiveness for UK exports. At a granular level we find that UK exporters invoice in multiple currencies---even when shipping a product to the same destination---and switch currencies over time. Remarkably, we fail to detect significant changes in the relative shares of invoicing currencies in response to the Brexit shock. Last but not least, we find that UK firms price-to-market, i.e., adjust markups to bilateral exchange rate and CPI movements, only when they invoice sales in the destination-market currency.
Keywords: dominant currency, Exchange Rates, Firm level data, Law of one price, markup elasticity, Pass through, Vehicle currency
JEL Classification: F31, F41
Suggested Citation: Suggested Citation