Pass‐through and Exposure

  • Author(s): Gordon M. Bodnar, Bernard Dumas, Richard C. Marston
  • Published: Dec 17, 2002
  • Pages: 199-231
  • DOI: 10.1111/1540-6261.00420

Firms differ in the extent to which they “pass through” changes in exchange rates into foreign currency prices and in their “exposure” to exchange rates—the responsiveness of their profits to changes in exchange rates. Because pricing affects profitability, a firm’s pass‐through and exposure should be related. This paper develops models of exporting firms under imperfect competition to study these related phenomena. From these models we derive the optimal pass‐through decisions and the resulting exchange rate exposure. The models are estimated on eight Japanese export industries using both the price data pass‐through and financial data for exposure.

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