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Invoicing and the Dynamics of Pricing-to-Market: Evidence from UK Export Prices around the Brexit Referendum

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  • Corsetti, Giancarlo
  • Crowley, Meredith A.
  • Han, Lu

Abstract

We provide micro-econometric evidence that, following the large and persistent sterling depreciation after the Brexit referendum, on impact, exchange rate pass-through (ERPT) was complete for transactions invoiced in producer currency and low for sales invoiced either in a vehicle or in the destination market currency. Yet these differences strikingly narrowed within six quarters. A weaker currency did not translate into a persistent gain in price competitiveness for UK exports. At a granular level we find that UK exporters invoice in multiple currencies---even when shipping a product to the same destination---and switch currencies over time. Remarkably, we fail to detect significant changes in the relative shares of invoicing currencies in response to the Brexit shock. Last but not least, we find that UK firms price-to-market, i.e., adjust markups to bilateral exchange rate and CPI movements, only when they invoice sales in the destination-market currency.

Suggested Citation

  • Corsetti, Giancarlo & Crowley, Meredith A. & Han, Lu, 2022. "Invoicing and the Dynamics of Pricing-to-Market: Evidence from UK Export Prices around the Brexit Referendum," CEPR Discussion Papers 13282, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13282
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    Cited by:

    1. Matthieu Crozet & Julian Hinz & Federico Trionfetti, 2023. "Exchange Rate Pass-Around," Working Papers hal-04150476, HAL.
    2. De Gregorio, José & García, Pablo & Luttini, Emiliano & Rojas, Marco, 2024. "From dominant to producer currency pricing: Dynamics of Chilean exports," Journal of International Economics, Elsevier, vol. 149(C).
    3. Drenik, Andrés & Perez, Diego J., 2021. "Domestic price dollarization in emerging economies," Journal of Monetary Economics, Elsevier, vol. 122(C), pages 38-55.
    4. Marco Garofalo & Giovanni Rosso & Roger Vicquéry, 2024. "Dominant Currency Pricing Transition," Economics Series Working Papers 1044, University of Oxford, Department of Economics.
    5. Rui Costa & Swati Dhingra & Stephen Machin, 2022. "New dawn fades: Trade, labour and the Brexit exchange rate depreciation," CEP Discussion Papers dp1890, Centre for Economic Performance, LSE.
    6. Crowley, Meredith A. & Han, Lu & Prayer, Thomas, 2024. "The pro-competitive effects of trade agreements," Journal of International Economics, Elsevier, vol. 150(C).
    7. Natalie Chen & Wanyu Chung & Dennis Novy, 2022. "Vehicle Currency Pricing and Exchange Rate Pass-Through," Journal of the European Economic Association, European Economic Association, vol. 20(1), pages 312-351.
    8. Maurice Obstfeld, 2020. "Global Dimensions of U.S. Monetary Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 16(1), pages 73-132, February.
    9. Alex Oktay, 2022. "Heterogeneity in the exchange rate pass-through to consumer prices: the Swiss franc appreciation of 2015," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 158(1), pages 1-20, December.
    10. Katarzyna Twarowska-Mól, 2023. "Factors influencing the choice of the invoicing currency in international trade: Panel data analysis for 55 countries," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 18(1), pages 153-183, March.
    11. Taiyo Yoshimi & Uraku Yoshimoto & Kiyotaka Sato & Takatoshi Ito & Junko Shimizu & Yushi Yoshida, 2023. "Invoice Currency Choice in Intra-Firm Trade: A Transaction-Level Analysis of Japanese Automobile Exports," Discussion papers ron353, Policy Research Institute, Ministry of Finance Japan.
    12. Berthou, Antoine & Horny, Guillaume & Mésonnier, Jean-Stéphane, 2022. "The real effects of invoicing exports in dollars," Journal of International Economics, Elsevier, vol. 135(C).
    13. Zou, Zongsen & Zhang, Yu & Wang, Meng & Wang, Xiuling, 2022. "Do export quality and destination income matter for exchange rate pass-through? Evidence from China," Economic Modelling, Elsevier, vol. 117(C).
    14. Benguria, Felipe & Wagner, Rodrigo, 2024. "Trade invoicing currencies and exchange rate pass-through: The introduction of the euro as a natural experiment," Journal of International Economics, Elsevier, vol. 150(C).
    15. Freitag, Andreas & Lein, Sarah M., 2023. "Endogenous product adjustment and exchange rate pass-through," Journal of International Economics, Elsevier, vol. 140(C).
    16. Andreas M. Fischer & Dr. Pinar Yesin, 2023. "The kindness of strangers: Brexit and bilateral financial linkages," Working Papers 2023-02, Swiss National Bank.
    17. Obstfeld, Maurice, 2020. "Harry Johnson’s “Case for Flexible Exchange Rates†– 50 Years Later," CEPR Discussion Papers 14488, C.E.P.R. Discussion Papers.
    18. Alcover, M. & Crowley, M. A., 2019. "China -- Broiler Products: Can the sum of the parts be less than the whole?," Cambridge Working Papers in Economics 1985, Faculty of Economics, University of Cambridge.
    19. Bahaj, Saleem, 2020. "Jumpstarting an International Currency," CEPR Discussion Papers 14793, C.E.P.R. Discussion Papers.
    20. Hang Do & Kiet Duong & Toan Huynh & Nam T. Vu, 2024. "The Real Effects of Brexit on Labor Demand: Evidence from Firm-level Data," Working Papers 117, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    21. Maurice Obstfeld, 2020. "Harry Johnson's “Case for flexible exchange rates”—50 years later," Manchester School, University of Manchester, vol. 88(S1), pages 86-113, September.
    22. Antoine Berthou, 2023. "International sanctions and the dollar: Evidence from trade invoicing," Working papers 924, Banque de France.
    23. Yohannes Ayele & L. Alan Winters, 2020. "How Do Exchange Rate Depreciations Affect Trade and Prices? A Survey and Lessons about UK Experience after June 2016," Working Paper Series 1420, Department of Economics, University of Sussex Business School.
    24. Gobbi, Lucio & Lucarelli, Stefano, 2022. "Pound Sterling depreciation and the UK's trade balance versus the USA's: Industry-level estimates," Structural Change and Economic Dynamics, Elsevier, vol. 60(C), pages 206-220.

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    More about this item

    Keywords

    Exchange rates; Pass through; Law of one price; Markup elasticity; Vehicle currency; Dominant currency; Firm level data;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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