Working Paper: NBER ID: w18615
Authors: Mary Amiti; Oleg Itskhoki; Jozef Konings
Abstract: Large exporters are simultaneously large importers. In this paper, we show that this pattern is key to understanding low aggregate exchange rate pass-through as well as the variation in pass-through across exporters. First, we develop a theoretical framework that combines variable markups due to strategic complementarities and endogenous choice to import intermediate inputs. The model predicts that firms with high import shares and high market shares have low exchange rate pass-through. Second, we test and quantify the theoretical mechanisms using Belgian firm-product-level data with information on exports by destination and imports by source country. We confirm that import intensity and market share are the prime determinants of pass-through in the cross-section of firms. A small exporter with no imported inputs has a nearly complete pass-through, while a firm at the 95th percentile of both import intensity and market share distributions has a pass-through of just above 50%, with the marginal cost and markup channels playing roughly equal roles. The largest exporters are simultaneously high-market-share and high-import-intensity firms, which helps explain the low aggregate pass-through and exchange rate disconnect observed in the data.
Keywords: exchange rate; passthrough; import intensity; market share
JEL Codes: F14; F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high import intensity (F10) | lower exchange rate passthrough (F31) |
| high market share (L17) | lower exchange rate passthrough (F31) |
| lower exchange rate passthrough (F31) | higher passthrough rate (H22) |
| marginal cost channel (D40) | lower exchange rate passthrough (F31) |
| markup channel (D40) | lower exchange rate passthrough (F31) |
| import intensity and market share (L19) | variation in passthrough (H29) |