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Corsetti, G., Crowley, M. A. and Han, L.

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

WP Number: 1815

Abstract: Analyzing the large and persistent sterling depreciation following the Brexit referendum, we provide microeconometric evidence that the currency in which a cross-border sale is invoiced predicts systematic differences in the dynamics of exchange rate pass-through (ERPT) and pricing to market. We find that, while ERPT is high for transactions invoiced in producer currency and low for sales invoiced either in a vehicle or in the destination market currency, these differences strikingly narrow within six quarters. Notably, the weaker currency did not translate into a persistent gain in price competitiveness for UK exports. We also find that 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. Finally, we document that the aggregate shares of invoicing currency remain remarkably stable over time and do not respond to the Brexit shock. Yet, at a granular level, UK firms invoice in multiple currencies—even when shipping a product to the same destination—and switch currencies over time.

Keywords: exchange rates, pass through, law of one price, markup elasticity, vehicle currency, dominant currency, firm level data

JEL Codes: F31 F41

Author links: Giancarlo Corsetti  Meredith Crowley  

PDF: wp1815.pdf

Open Access Link: 10.17863/CAM.33790

Keynes Fund Project(s):
Credit Constraints and Optimal Price Setting in International Markets (JHOR)  

Grant: Brexit Project

Theme: transmission