Multi-product exporters, variable markups and exchange rate fluctuations

Mauro Caselli, Arpita Chatterjee and Alan Woodland

Canadian Journal of Economics, 2017, vol. 50, issue 4, 1130-1160

Abstract: In this paper we investigate how firms adjust markups across products in response to fluctuations in the real exchange rate. We estimate markups at the marketproductplant level using detailed panel production and cost data from Mexican manufacturing between 1994 and 2007. Exploiting variation in the real exchange rate in the aftermath of the peso crisis in December 1994, we provide robust empirical evidence that plants increase their markups and producer prices in response to a real depreciation and that this increase is greater for products with higher productivity. Thus, we provide direct evidence for the theoretical mechanism of variable markup response behind incomplete and heterogeneous exchange rate pass-through on producer prices. Our empirical methodology allows us to decompose the producer price response to exchange rate shocks into a markup and a marginal cost component using our markup estimates. Using these estimates, we establish that marginal cost at the productplant level increases more in response to real exchange rate depreciation if the plant has higher share of imported inputs.

JEL-codes: F14 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (24)

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