Pricing of exports: exchange rate pass-through and the planning horizon of firms

Trond-Arne Borgersen

Global Business and Economics Review, 2007, vol. 9, issue 1, 8-18

Abstract: This paper presents a model for the pricing of exports that relates exchange rate pass-through to the planning horizon of firms. Exchange rate pass-through is often analysed assuming exporters have short horizons, even though a number of arguments can be applied for why longer horizons govern their behaviour. In order to analyse how differences in planning horizons affect the pass-through structure, two situations are compared. One is where firms set prices to maintain a fixed mark-up each period, continuously ensuring the 'Law of One Price' (LOP). The other is where longer horizons govern exporters' behaviour, and export prices adjust according to intertemporal optimisation. Export prices are then linked to the long-run equilibrium value of the exchange rate, and deviations from the LOP come about in the short run, as LOP is a long-run solution. The model predictions are in accordance with empirical observations.

Keywords: export prices; exchange rate pass-through; planning horizons. (search for similar items in EconPapers)
Date: 2007
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