Pricing of exports: exchange rate pass-through and the planning horizon of firms
by Trond-Arne Borgersen
Global Business and Economics Review (GBER), Vol. 9, No. 1, 2007

Abstract: This paper presents a model for the pricing of exports that relates exchange rate pass-through to the planning horizon of firms. Exchange rate pass-through is often analysed assuming exporters have short horizons, even though a number of arguments can be applied for why longer horizons govern their behaviour. In order to analyse how differences in planning horizons affect the pass-through structure, two situations are compared. One is where firms set prices to maintain a fixed mark-up each period, continuously ensuring the 'Law of One Price' (LOP). The other is where longer horizons govern exporters' behaviour, and export prices adjust according to intertemporal optimisation. Export prices are then linked to the long-run equilibrium value of the exchange rate, and deviations from the LOP come about in the short run, as LOP is a long-run solution. The model predictions are in accordance with empirical observations.

Online publication date: Mon, 19-Feb-2007

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