| 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: |
The objective of this article is to assess the plausibility of individual and joint hypotheses regarding the significance of menu costs, incomplete exchange rate pass-through (ERPT) and the choice of currency for invoicing purposes. It was found that 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. Invoicing in the importing country’s currency and market
power appear to characterize the behavior of Quebec exporters
in their dealings with Japanese importers. We also found evidence
of market power in Canadian exports to the United
States, but it was not possible to validate the hypothesis that
export sales are invoiced in U.S. dollars. A simulation showed
that the pass-through coefficients for exports shipped to the
U.S. are consistent with the concurrent use of the Canadian and
U.S. currencies by Canadian exporters. The across-destinations differences in our results suggest
that the choice of currency for invoicing might be conditioned
by destination-specific factors beside heterogeneity among exporting
firms. Overall, our results are consistent with the stylized
facts of world pork trade, Canada being a major player
on the world scene, and with the differences in the domestic
market structures of the Quebec and Manitoba processing
sectors. |
| 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 |
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