A new approach to tests of pricing-to-market

Joseph Byrne, Ekaterina Kortava and Ronald MacDonald

Journal of International Money and Finance, 2013, vol. 32, issue C, 654-667

Abstract: This study proposes a new approach to tests of pricing-to-market, which defines the responsiveness of export prices to currency movements. Pricing-to-market parameters may be susceptible to time variation, and we account for this in a novel theoretical and empirical contribution to the literature. We extend the benchmark model of pricing-to-market to account for instability in the relationship between export prices and exchange rates. Moreover, using an empirical methodology robust to parameter instability, we examine the forecasting performance of a pricing-to-market model. In doing so we apply a selection of model mis-specification tests robust to varying degrees of parameter evolution to recent aggregate and disaggregate UK export data. Our estimation results provide strong evidence of pricing-to-market and the instability in the response of export prices to exchange rate fluctuations.

Keywords: Exchange rate; Forecasting; Parameter instability; Pricing-to-market (search for similar items in EconPapers)
JEL-codes: F1 F3 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:32:y:2013:i:c:p:654-667

DOI: 10.1016/j.jimonfin.2012.06.001

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