Exchange-Rate Regimes and the Behaviour of Exporters

Cosimo Petracchi (), Luca Riva and Marco Stenborg Petterson ()
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Cosimo Petracchi: Tor Vergata University of Rome
Marco Stenborg Petterson: University of Naples Federico II and CSEF., https://csef.it/people/marco-stenborg-petterson/

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

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. We quantify this mechanism using micro-level data from the European car market (1970–99). We show that floating regimes are associated with limited adjustment in destination-currency prices and limited response in quantities sold. We 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 F31 F41 F44 L11 L62 N14 (search for similar items in EconPapers)
Date: 2026-07-09
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:789

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