Working Paper: NBER ID: w4806
Authors: Atish R. Ghosh; Holger C. Wolf
Abstract: Export firms are often assumed to stabilize destination market prices in the face of nominal exchange rate changes in order to protect market share. We show that standard tests of such pricing to market fail to discriminate against the alternative hypothesis of menu costs. As a case study, we examine the characteristics and determinants of changes in the cover prices of The Economist magazine in a sample of twelve countries over the floating rate period. We find that, while the law of one price fails, there is no evidence of systematic attempts to offset nominal exchange rate movements. Instead, the findings are consistent with menu cost driven pricing behavior.
Keywords: International pricing; Menu costs; Exchange rates; Pricing to market
JEL Codes: F10; F12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| menu costs (E64) | sluggish response of prices to exchange rate changes (F31) |
| menu costs + foreign currency invoicing (F31) | sluggish response of prices to exchange rate fluctuations (F31) |
| menu costs (E64) | misinterpretation as strategic pricing behavior (D40) |
| incomplete passthrough of exchange rate movements (F31) | local prices (P22) |
| exchange rate movements (F31) | local prices (P22) |