Exchange-Rate Regimes and the Behaviour of Exporters

Cosimo Petracchi (), Luca Riva () and Marco S. Petterson ()
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Cosimo Petracchi: DEF, University of Rome "Tor Vergata", http://www.ceistorvergata.it
Luca Riva: Central Bank of Ireland, University College Dublin
Marco S. Petterson: Naples Federico II and CSEr

No 627, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: This paper proposes a firm-level mechanism that explains why exchange-rate regimes are largely neutral with respect to real macro variables: exporters actively adjust marginal costs and markups to absorb nominal exchange-rate fluctuations. Me quantify this mechanism using micro-level data from the European car market (1970–99). Me show that floating regimes are associated with limited adjustment in destination-currency prices and limited response in quantities sold. Me then estimate a structural demand-and-supply system to recover product-level markups and marginal costs. At breaks from pegged to floating regimes, producer-currency markups (marginal costs) fall on impact by around 11% (10%). A two-country real business cycle model with segmented financial markets, incorporating pricing-to-market and operational hedging, rationalises these patterns. Our model underscores the role of real micro rigidities, rather than nominal rigidities, in the weak transmission of exchange-rate fluctuations to real macro variables

Keywords: European car market; exchange-rate regimes; demand estimation; pricing-to-market; variable markups; real rigidities (search for similar items in EconPapers)
JEL-codes: D22 L11 L62 N14 R31 R41 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2026-08-06, Revised 2026-08-06
New Economics Papers: this item is included in nep-eur and nep-opm
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