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Price Adjustment to Exchange Rates and Forward‐looking Exporters: Evidence from USA–China Trade
Author(s) -
Li Yao Amber,
Zhao Chen Carol
Publication year - 2016
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12246
Subject(s) - economics , exchange rate , china , product (mathematics) , monetary economics , international economics , exchange rate pass through , geometry , mathematics , political science , law
This paper shows that the pricing behavior of exporting firms exhibits a “forward‐looking” nature with sticky prices. As a result, the expectations of future exchange rates affect current prices at both the product level and firm level. We find evidence by employing both highly disaggregated Harmonized System (HS) 10‐digit product‐level import data of the USA and firm–product level customs data on China's exports to the USA. These findings provide evidence for a previously unexplored micro‐level forward‐looking nature of trade price adjustment as response to future exchange rates, and suggest a potentially important factor in helping explain incomplete exchange rate pass‐through.