Exchange Rates, Cross-border Travel, And Retailers: Theory And Empirics

Jen Baggs, Beverly Lapham and Loretta Fung

No 1351, Working Paper from Economics Department, Queen's University

Abstract: This paper provides a theoretical and empirical analysis of the effects of nominal exchange rate movements on cross-border travel by consumers and on retail firms' sales. We develop a search-theoretic model of price-setting heterogeneous retailers and traveling consumers who face nominal exchange rate shocks. These exchange rate shocks act as both a supply side shock for retailers though imported input prices and a demand side shock though their effect on the propensity for consumers to cross the border and shop at foreign retail stores. The model provides predictions regarding relationships between firm and regional characteristics and the magnitude of the effects of nominal exchange rate fluctuations and resulting cross-border travel activity on retailers' sales. We use our theoretical framework to motivate an empirical methodology applied to Canadian firm and consumer level data from 1987 to 2007. Our findings indicate that an appreciation of the Canadian dollar substantially increases cross border travel which in turn has a significant negative effect on the sales of Canadian retailers. These effects diminish with the distance of the retailer from the border and with the shopping opportunities available at relevant US destinations. Using counterfactual experiments, we quantify the effects of more restrictive border controls after September 2001 which discouraged cross-border trips and reduced retailer losses from cross-border shopping as well as the effects of increased duty free allowances which raised cross-border trips and reduced retailer sales.

Keywords: International Price Differences; Cross-Border Shopping; Firm Dynamics; Exchange Rate Pass-Through (search for similar items in EconPapers)
JEL-codes: F10 F14 L81 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2015-08
New Economics Papers: this item is included in nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1351.pdf First version 2015 (application/pdf)

Related works:
Journal Article: Exchange rates, cross-border travel, and retailers: Theory and empirics (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:1351

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