HKUST IEMS Working Papers No. 2015-28
This paper shows that the pricing behavior of exporting firms exhibits a “forward-looking” nature under sticky prices. It offers a channel by which the expectations of future exchange rates affect current prices. To seek the micro-level evidence, we adopt detailed product-level import data of the United States and firm-product-level export data of China combined with forward premiums to study the exchange rate pass-through. We find that not only current (and past) exchange rate fluctuations but also anticipated future exchange rate changes effectively pass through into current prices, suggesting a potentially important factor in help explaining incomplete exchange rate pass-through.
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