Saturday, January 28, 2017

Why currency devaluations are losing their punch

Typically a currency devaluation will help domestic firms and harm domestic consumers because it makes exports cheaper in the foreign country, and imports more expensive.  However, if the domestic firms also import, then the currency devaluation also drives the costs of exporters up.
We find that large exporting firms are also the most import-intensive firms, sourcing a large share of their intermediate inputs from abroad.

Further evidence comes from the effect of devaluations on large and small firm prices, called "pass-through:"
We estimate that large exporters pass-through only about 50% of exchange rate devaluations into their prices. In other words, in response to a 10% devaluation, these firms would cut their export prices only by 5%. ... By contrast, the small exporting firms, which rely on few imported inputs in production, reduce their prices by nearly the full amount of the devaluation.

In other words, the simple message of Chapter 11, that currency devaluations benefit domestic firms and harm domestic consumers, is muted by the mere fact that the biggest exporting firms are also importers.

HT:  Microeconomic Insights

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