Working Paper: NBER ID: w21413
Authors: Michael B. Devereux; Ben Tomlin; Wei Dong
Abstract: This paper investigates the impact of market structure on the joint determination of exchange rate pass- through and currency of invoicing in international trade. A novel feature of the study is the focus on market share of firms on both sides of the market—that is, exporting firms and importing firms. A model of monopolistic competition with heterogeneous firms has the following set of predictions: a) exchange rate pass-through should be non-monotonic and U-shaped in the market share of exporting firms, but monotonically declining in the market share of importers; b) exchange rate pass-through should be lower, the higher is local currency invoicing of imports; and c) producer currency invoicing should be related non-monotonically and U-shaped to exporter market share, and monotonically declining in importing firms’ market share. We test these predictions using a new and large micro data set covering the universe of Canadian imports over a six-year period. The data strongly support all three predictions.
Keywords: exchange rate pass-through; currency of invoicing; market share; international trade; monopolistic competition
JEL Codes: F3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market share of exporting firms (F10) | Exchange rate pass-through (F31) |
| Market share of importers (F10) | Exchange rate pass-through (F31) |
| Market share of importers (F10) | Local currency invoicing (F31) |
| Market share of exporting firms (F10) | Local currency invoicing (F31) |