Exchange Rate Volatility, Pricing to Market and Trade Smoothing
IMF Working Papers, October 1, 1997
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- Exchange Rate Volatility, Pricing to Market and Trade Smoothing
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Bibliographic details
- Authors: Hamid Faruqee, Peter B. Clark
- Published: October 1, 1997
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451936629.001
Summary
- The paper investigates the consequences of exchange rate volatility on the variability of export prices and quantities in the presence of market segmentation and pricing to market.
- Firms stabilize destination prices through systematic price discrimination, limiting the degree of exchange rate pass-through.
- As a result, the variability of exchange rates is not fully translated into prices and quantities at the point of destination.
Key findings
- Empirical estimates using aggregate price data for the G-7 industrial countries show incomplete pass-through in variances, with considerable variation among these countries.
- U.S. industry specific data also indicate incomplete pass-through in most cases, with considerable variation across industries.
- Pricing-to-market behavior by firms acts to smooth trade outcomes by muting the transmission of exchange rate volatility into destination prices and quantities.
Implications for analysis and policy
- Models and forecasts that assume full exchange rate pass-through may overstate the impact of exchange rate volatility on destination prices and trade volumes.
- Sector- and country-specific variation in pass-through implies that policy assessments should account for heterogeneity across industries and across G-7 countries.
- Understanding the extent of price discrimination and market segmentation is important for evaluating how exchange rate shocks propagate to trade and inflation.
Hamid Faruqee, and Peter B. Clark. "Exchange Rate Volatility, Pricing to Market and Trade Smoothing", IMF Working Papers 1997, 126 (1997), October 1, 1997.
Content in this bundle
- Exchange Rate Volatility, Pricing to Market and Trade Smoothing -WP/97/126