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Exchange Rate Pass-Through, Currency of Invoicing and Market Share

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Listed:
  • Michael Devereux
  • Wei Dong
  • Ben Tomlin

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.

Suggested Citation

  • Michael Devereux & Wei Dong & Ben Tomlin, 2015. "Exchange Rate Pass-Through, Currency of Invoicing and Market Share," Staff Working Papers 15-31, Bank of Canada.
    • Handle: RePEc:bca:bocawp:15-31
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    References listed on IDEAS

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    More about this item

    Keywords

    Exchange rates; Inflation and prices; Market structure and pricing;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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