The Pricing-To-Market of US Firms
University of Idaho Seed Grant
Unlike the conventional wisdom that dollar depreciation reduces US trade deficit, UStrade balance is rather insensitive to exchange rate movement. Economists try to explain this bystudying how firms make price adjustments in response to currency fluctuations, the so-calledPricing-To-Market (PTM) behavior. Existing research has found that US exporters do not changetheir profit margins in response to currency movements comparing to exporters from othercountries (Knetter, 1989 and 1993). However, constrained by the availability of micro-data,much of existing research uses industry-level data and thus assumes that the marginal costchanges are the same for firms within an industry. The goal of this project is to relax thisassumption by using firm-level data available through the Census Bureau. Understanding firms’PTM behavior would further shed light on how firms make strategic decisions such as the entryof export market, investment decisions and exchange rate risk management.Methodologically, the project involves two steps. First, firm-level PTM elasticities areestimated by adding firm fixed effects to control for unobserved marginal cost changes, and thusmore accurate estimates for PTM elasticities are obtained. Second, the estimated PTM elasticitiesare related to firm characteristics to reconcile aggregate and firm level findings.