Pricing to pass‐through under volatile exchange rate scenario in the US manufacturing
| Date | 01 March 2011 |
| Pages | 53-60 |
| DOI | https://doi.org/10.1108/20425961201000005 |
| Published date | 01 March 2011 |
| Author | Tantatape Brahmasrene,Jui‐Chi Huang |
| Subject Matter | Public policy & environmental management |
World Journal of Enterprenuership, Management and Sustainable Development, Vol. 6, Nos. 1/2, 2010
53
Copyright © 2010 WASD
Abstract: A plethora of studies suggests the pricing decisions depend on
product substitutability, costs, market structures, and the magnitude of exchange
rate uncertainty in the international setting. Taking a departure from existing
literature, this paper examines the average degree of exchange rate pass-through to
the prices of export product under low to high exchange rate volatility. A panel
data estimation method is performed using the annual U.S. export data to 69
export destinations across 111 four-digit Standard Industrial Classification (SIC)
industries. An average zero or insignificant pass-through estimate for all industries
in the high exchange-rate-fluctuation sub-sample confirms the hypothesis. In this
period of high exchange risk, the possible high hedging engagements disconnect
the relationship between exchange rate movements and export pricing.
Keywords: pass-through; foreign exchange volatility; international pricing
Tantatape Brahmasrene*1, Purdue University North Central, U.S.A.
Jui-Chi Huang2, Pennsylvania State University, U.S.A.
PRICING TO PASS-THROUGH UNDER
VOLATILE EXCHANGE RATE SCENARIO
IN THE U.S. MANUFACTURING
INTRODUCTION
Research on exchange rate pass-through
is vital to understanding the relationship
between exchange rates and prices, including
import and export prices, and domestic
inflation. The incomplete exchange rate
pass-through can be explained by a market
power, the imported inputs, the speed of
price adjustment, the asymmetric response
to exchange rate fluctuations, the choice of
exchange rates and indices, price rigidity,
multinational operations by related and
non-related party trade, and the market
segmentation by trade costs. Most research
on the pricing behaviors under a theory
of imperfect competition concludes that
exchange rates are less than fully passed
through in some markets and the market
power plays an important role in local
price destabilization (Dunn, 1970; Isard,
1977; Kravis and Lipsey, 1977; Richardson,
1978; Giovannini, 1988; Knetter, 1989;
Feinberg, 1986, 1989 and 1996). In
addition, the degree of pass-through is not
only destination-specific but also sector-
specific. It varies both within and across
industries due to the differences in product
differentiation and market structure (Caselli,
1996; Athukorala and Menon, 1994;
Athukorala, 1991; Parsley, 1993; Menon,
1991). In general, the ability of adjusting
1*College of Business, Purdue University North Central, Westville, IN 46391-9528, U.S.A. E-mail: tapeb@pnc.edu
2Division of Engineering, Business, and Computing, Pennsylvania State University Berks Campus Reading,
PA 19610, U.S.A.
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