How Exporters React to Exchange Rate Movements: An Explanation by a Threshold Model
Abstract
The objective of this paper is to analyze the adjustments in selling prices face to movement of exchange rates. For this, we use non-linear threshold effects models. Our results confirm that the more a company is exposed to currency risk due to its exports, the higher the incentive to sell directly in the currency of the buyer is greater. Indeed, the behavior and the choice of pricing depend on direction and magnitude of changes in exchange rates. The firms may choose not to pass all changes on their selling price. This choice depends on several factors: the costs of price adjustment are not negligible, their strategic choice to win market share, and finally, by their desire to increase their profit margins face a shock changes.
Keywords: Exchange rate, Pricing-to-Market, Threshold model.
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