| Hardcopy Reference: |
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| Title: |
A joint test of market power, menu costs, and currency invoicing |
| Author(s): |
Jean-Philippe Gervais, Bruno Larue |
| Publication Year: |
2009 |
| Reference: |
Agricultural Economics 40 (2009) 29–41 |
| Country: |
Canada and USA |
| Summary: |
This article developed a theoretical ERPT framework accounting
for menu costs and different choices of currency for
invoicing purposes. Menu costs make it costly for exporters to
revise their prices in response to exchange rate changes. This
introduces a nonlinearity between the exchange rate and the export
price. This nonlinearity motivates the empirical specification
of a two-regime pass-through model to analyze the pricing
decisions of pork exporters from two Canadian provinces to
the U.S. and Japan. The choice of currency used for invoicing purposes imposes theoretical restrictions on the pass-through
in the first regime (i.e., when menu costs are high relative to
the profits arising from a price change) which can be tested
empirically.
The empirical model rejects the null hypothesis of no menu
costs in three of the four equations. Statistically significant
menu costs are identified in the export pricing decisions of
Quebec and Manitoba exporters in their dealings with U.S.
buyers. Manitoba pork exporting firms also appear to face menu
costs in their dealings with Japanese buyers. We argue that the
nonrejection in the case of the Quebec–Japan ERPT equation is
more likely attributable to the small length of our sample than
to the actual significance of menu costs faced by Quebec firms.
Overall, the empirical evidence favors threshold pass-through
models over linear ones. |
| Abstract: |
This article investigates exchange rate pass-through (ERPT) and currency invoicing decisions of Canadian pork exporters in the presence of
menu costs. It is shown that when export prices are negotiated in the exporter’s currency, menu costs cause threshold effects in the sense that there
are bounds within (outside of) which price adjustments are not (are) observed. Conversely, the pass-through is not interrupted by menu costs when
export prices are denominated in the importer’s currency. The empirical model focuses on pork meat exports from two Canadian provinces to the
U.S. and Japan. Hansen’s (2000) threshold estimation procedure is used to jointly test for currency invoicing and incomplete pass-through in the
presence of menu costs. Inference is conducted using the bootstrap with pre-pivoting methods to deal with nuisance parameters. The existence of
menu cost is supported by the data in three of the four cases. It also appears that Quebec pork exporters have some market power and invoice in
Japanese yen their exports to Japan. Manitoba exporters also seem to follow the same invoicing strategy, but their ability to increase their profit
margin in response to large enough own-currency devaluations is questionable. Our currency invoicing results for sales to the U.S. are consistent
with subsets of Canadian firms using either the Canadian or U.S. currency. |
| Database: |
Economics |
