DP13282 Invoicing and the Dynamics of Pricing-to-Market: Evidence from UK Export Prices around the Brexit Referendum

Author(s): Giancarlo Corsetti, Meredith A Crowley, Lu Han
Publication Date: October 2018
Date Revised: June 2020
Keyword(s): dominant currency, Exchange Rates, Firm level data, Law of one price, markup elasticity, Pass through, Vehicle currency
JEL(s): F31, F41
Programme Areas: International Trade and Regional Economics, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13282

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.