Title: Pricing of exports: exchange rate pass-through and the planning horizon of firms
Authors: Trond-Arne Borgersen
Addresses: The Financial Supervisory Authority of Norway, Ostensjoveien 43, PB 100 Bryn, N-0611 Oslo, and Faculty of Business, Social Sciences and Foreign Languages, Ostfold University College, N-1757 Halden, ReBor, Froyasgate 15 A, N-1608 Fredrikstad, Norway
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.
Keywords: export prices; exchange rate pass-through; planning horizons.
Global Business and Economics Review, 2007 Vol.9 No.1, pp.8 - 18
Published online: 19 Feb 2007 *
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