Exchange rates, cross-border travel, and retailers: Theory and empirics

Jen Baggs, Loretta Fung and Beverly Lapham

Journal of International Economics, 2018, vol. 115, issue C, 59-79

Abstract: This paper provides a theoretical and empirical analysis of the effects of nominal exchange rate movements on retail firms' sales, emphasizing the role of cross-border travel by consumers. We develop a search-theoretic model of price-setting heterogeneous retailers and traveling consumers who face nominal exchange rate shocks. These shocks affect retailers on the supply side, through imported input prices, and on the demand side, via their effect on the propensity for consumers to cross the border and shop at foreign retail stores. We use Canadian retailer and traveler data from 1986 to 2007 to estimate the model. Consistent with the model, the empirical results indicate that an appreciation of the Canadian dollar substantially increases Canadians' cross border travel which has a significant negative effect on the sales of Canadian retailers. These effects diminish with the distance to the nearest US shopping destination, relative population and the median income of the community in which the retailer operates. Using counterfactual experiments, we quantify the positive effects on Canadian retailers' sales of more restrictive border controls after September 2001, and the negative effects on those sales of increased Canadian duty free allowances and the expansion of US shopping opportunities.

Keywords: International price differences; Firm dynamics; Exchange rate pass-through; Cross-border shopping (search for similar items in EconPapers)
JEL-codes: F10 F14 L81 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022199618302733
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Exchange Rates, Cross-border Travel, And Retailers: Theory And Empirics (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:115:y:2018:i:c:p:59-79

DOI: 10.1016/j.jinteco.2018.08.008

Access Statistics for this article

Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and Rodríguez-Clare, Andrés

More articles in Journal of International Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().