## Exchange Rate Volatility, Pricing to Market and Trade Smoothing

_IMF Working Papers, October 1, 1997_

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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

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### 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.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/exchange-rate-volatility-pricing-to-market-and-trade-smoothing-2352_