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Gravity Models and Asymmetric Exchange Rate Effects: Insights from German Beer Exports
Author(s) -
Dreyer Heiko,
Fedoseeva Svetlana
Publication year - 2016
Publication title -
agribusiness
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.57
H-Index - 43
eISSN - 1520-6297
pISSN - 0742-4477
DOI - 10.1002/agr.21469
Subject(s) - economics , exchange rate , currency , gravity model of trade , exchange rate pass through , bilateral trade , monetary economics , international economics , china , law , political science
Recent developments in trade literature suggest that in the presence of strategic pricing in some markets and an incomplete exchange rate pass‐through resulting from it, the standard gravity model has to be augmented with an exchange rate variable. As symmetry of pass‐through has been questioned in new pricing‐to‐market (PTM) studies, we argue that this asymmetric impact of the exchange rate on trade should be explicitly modeled within the gravity framework. This consideration of asymmetric effects of exchange rate appreciations and depreciations on export values and quantities might provide insights into the driving forces of PTM in a particular market (or group of markets) given that the existing literature emphasizes two main hypotheses that explain the occurrence of an asymmetric PTM (market share hypothesis and marketing bottleneck hypothesis). In this paper, we propose a way to integrate individual (asymmetric) long‐run effects of currency appreciations and depreciations on trade flows into the gravity model and empirically investigate which of the driving forces is relevant for the case of German beer exports. PTM studies often argue that the market share protection is a reason for local currency price stabilization mechanisms applied in the most important markets. Yet, the results of our analysis reveal that this might no longer be the case when all trading partners are considered. [EconLit citations: C33; F14; L66].