"Exchange rate moves have surprisingly small effects on prices."
" This apparent ‘disconnect’ is one of the central puzzles in international macroeconomics."
". If prices don’t respond sufficiently to exchange rates then neither do quantities, and the expenditure-switching role of exchange rates is diminished (see Engel 2003)."
" (Amiti et al. 2012), show that the largest exporters are also the largest importers. "
" exporters are hit by an exchange rate shock in their destination market, they typically face a compensating movement in the marginal costs if they are importing their intermediate inputs."
".. an appreciation of the euro relative to the US dollar, while increasing the domestic costs of European firms (in US dollars), typically reduces their euro costs of international sourcing of intermediate inputs"
"empirically, the movements in the value of a country's currency are correlated across its trade partners. This natural hedging from exchange rate movements, inherent in the imports of intermediate inputs, reduces the need for exporters to adjust their export market prices
"Using Belgian firm-level data....t exporters that import a large share of their inputs pass on a much smaller share of the exchange rate shock to export prices."
" import-intensive firms typically have high export market shares, and hence set high mark-ups and actively move them to offset the effects of changes in their marginal cost on export prices,\
providing a second channel that limits the pass-through of exchange rate shocks"
" a typical small exporter with no imported inputs has a nearly complete pass-through,"
" large import-intensive exporter has a pass-through just above 50%,at an annual horizon1"
" this large cross-sectional variation in pass-through is accounted for roughly equally
by the two mechanisms:
the offsetting movements in both
the mark-up
and
the marginal cost by means of imported inputs"
". These two mechanisms reinforce each other and help insulate the international prices of major exporters from the economic conditions in their domestic market limiting the expenditure-switching role of exchange rates."
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"An interesting new stylised fact to emerge from this analysis:
large systematic differences across exporters."
" Previous studies have emphasised the differences between exporters and non-exporters, highlighting that exporters are bigger, more productive, and pay a wage premium,
. However, even within the select group of firms that are exporters there are very large differences between high import-intensity exporters and low import-intensity exporters."
" Splitting the sample based on the median import intensity:
import-intensive exporters are 2.5 times larger in terms of employment than exporters with low import intensity"
" and an order of magnitude larger than non-exporters."
" Similar rankings are present for measured productivity, material costs, and wages, as well as extensive and intensive margins of imports and exports. These patterns are illustrated in Table 1."
large systematic differences across exporters."
" Previous studies have emphasised the differences between exporters and non-exporters, highlighting that exporters are bigger, more productive, and pay a wage premium,
. However, even within the select group of firms that are exporters there are very large differences between high import-intensity exporters and low import-intensity exporters."
" Splitting the sample based on the median import intensity:
import-intensive exporters are 2.5 times larger in terms of employment than exporters with low import intensity"
" and an order of magnitude larger than non-exporters."
" Similar rankings are present for measured productivity, material costs, and wages, as well as extensive and intensive margins of imports and exports. These patterns are illustrated in Table 1."
Table 1 Exporting firms with high and low import intensity
| Exporters | Non-exporters | ||
| High import intensity | Low import intensity | ||
| Share of total imports in total cost | 36.8% | 17.3% | 1.6% |
| Share of non-euro imports in total cost | 16.6% | 1.2% | 0.3% |
| Employment (# full-time equiv. workers) | 270.9 | 112.1 | 20.7 |
| Material cost (millions of euros) | 103.5 | 28.1 | 3.0 |
| Average wage bill per worker (thousands of euros) | 48.8 | 42.3 | 34.9 |
| Export value (millions of euros) | 49.6 | 9.4 | — |
| Import value (millions of euros) | 49.3 | 6.9 | — |
| — outside Eurozone | 20.8 | 0.5 | — |
" these patterns are central in explaining the heterogeneity of exchange rate pass-through into export prices across firms."
" Furthermore, because import-intensive firms are also the largest exporters, these results help to explain the low aggregate pass-through."
- firm market share and import intensity are the two key determinants of pass-through in the cross-section of firms within a given industry and export market, explaining a wide range of variation in exchange rate pass-through.
"imports from within the Eurozone have little effect on pass-through."
"the lowest pass-through rate, 61%, is found for the firms with both market share and import intensity above the respective medians. These patterns are robust to alternative cuts of the data and additional controls2."
Table 2 Pass-through by import-intensity and market-share bins
| Low import intensity | High import intensity | |
| Low market share | ||
| Pass-through coefficient | 0.89 | 0.85 |
| Fraction of observations | 30.3% | 20.0% |
| Share in export value | 8.8% | 9.3% |
| High market share | ||
| Pass-through coefficient | 0.77 | 0.61 |
| Fraction of observations | 19.9% | 30.1% |
| Share in export value | 21.2% | 60.7% |
- decomposing the incomplete pass-through into the marginal cost channel and mark-up channel, the two channels contribute roughly equally to the variation in pass-through across firms.
"the implications differ if incomplete pass-through is due to different distributions of mark-ups across firms or if it is due to the complex global sourcing patterns" which directly affect marginal costs. "
"Firms with large market shares adjust their mark-ups more than small firms do in response to cost shocks.
"Firms with large market shares adjust their mark-ups more than small firms do in response to cost shocks.
- Finally, these results have implications for aggregate pass-through;.
Because of the positive correlation between import intensity and market share, most of the observations lie along the diagonal in Table 2 (30% in each diagonal bin and only around 20% in the off-diagonal bins). Interestingly, while the ‘high import intensity-high market share’ bin contains 30% of the observations, those firms account for more than 60% of the value of exports. Given that these are the lowest pass-through firms, this suggests low aggregate pass-through. Indeed, a large share of exports is that of the bigger firms which source their inputs globally and are thus only partially linked to the domestic market conditions in their home country. As a result, these firms are effectively hedged against exchange rate fluctuations and do not need to fully adjust their prices. Furthermore, these are the strong market-power firms, setting high mark-ups and actively varying them to accommodate for cost shocks.
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"The prices of the largest firms, accounting for their disproportionate share of trade, are insulated from exchange rate movements both through the hedging effect of imported inputs and through active offsetting mark-up adjustment in response to cost shocks."
" Both forces limit the expenditure-switching effect of a given exchange rate movement, but have very different implications for the allocative efficiency of global production. "
" the international competitiveness effects of a euro devaluation are likely to turn out to be modest given the extensive international sourcing by major exporters"
". In addition, a weaker euro is likely to have limited effects on prices and quantities, with the changes largely reflected in the profit margins of major exporters."
