Working Paper: CEPR ID: DP13282
Authors: Meredith A. Crowley; Giancarlo Corsetti; Lu Han
Abstract: We provide micro-econometric evidence that, following the large and persistent sterling depreciation after the Brexit referendum, on impact, exchange rate pass-through (ERPT) was complete for transactions invoiced in producer currency and low for sales invoiced either in a vehicle or in the destination market currency. Yet these differences strikingly narrowed within six quarters. A weaker currency did not translate into a persistent gain in price competitiveness for UK exports. At a granular level we find that UK exporters invoice in multiple currencies---even when shipping a product to the same destination---and switch currencies over time. Remarkably, we fail to detect significant changes in the relative shares of invoicing currencies in response to the Brexit shock. Last but not least, we find that UK firms price-to-market, i.e., adjust markups to bilateral exchange rate and CPI movements, only when they invoice sales in the destination-market currency.
Keywords: exchange rates; pass-through; law of one price; markup elasticity; vehicle currency; dominant currency; firm-level data
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Invoicing Currency (F31) | Exchange Rate Pass-Through (F31) |
| Brexit Shock (F69) | Relative Shares of Invoicing Currencies (F31) |
| Invoicing Currency (F31) | Pricing Strategies (D49) |
| Exchange Rate Movements (F31) | Markup Adjustments (D49) |
| Invoicing Currency (F31) | Price Competitiveness (L11) |