Exchange Rate Pass-Through and Credit Constraints: Firms Price to Market as Long as They Can

Georg Strasser

No 788, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: The macroeconomic evidence on the short-term impact of exchange rates on exports and prices is notoriously weak. In this paper I examine the micro-foundations of this disconnect by looking at firms' export and price setting decisions in response to fluctuations in exchange rates and credit conditions using German firm survey data. Firm- level data on pricing and export expectations enables me to measure the instantaneous response of each firm to changing financial constraints and the EUR/USD exchange rate, which avoids endogeneity issues. I find that primarily large firms cause the exchange rate "puzzles" in aggregate data. The exchange rate disconnect disappears for financially constrained firms. For these firms, the pass-through rate of exchange rate changes to prices is more than twice the rate of unconstrained firms. Similarly, their export volumes are about twice as sensitive to exchange rate fluctuations. Credit therefore affects not only exports via trade finance, but also international relative prices by constraining the scope of feasible pricing policies. The effect of borrowing constraints is particularly strong during the recent financial crisis.

Keywords: exchange rate pass-through; exchange rate disconnect; financing constraints; pricing to market; exports; credit crunch; trade collapse; law of one price; trade finance (search for similar items in EconPapers)
JEL-codes: E32 E44 F31 F40 G21 (search for similar items in EconPapers)
Date: 2011-10-21, Revised 2012-02-13
New Economics Papers: this item is included in nep-cba, nep-cis, nep-hme, nep-ifn, nep-int, nep-mon and nep-opm
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Citations: View citations in EconPapers (3)

Published, Journal of Monetary Economics, 2013, 60:1, 25-38

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Journal Article: Exchange rate pass-through and credit constraints (2013)
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