# How Important Are Trade Prices for Trade Flows?

- 117 Downloads

## Abstract

US imports and exports respond little to exchange rate changes in the short run. Firms’ pricing behavior is thought central to explaining this response: If local prices do not respond to exchange rates, neither will trade flows. Sticky prices, strategic complementarities, and imported intermediates can reduce the trade response, and they are necessary to match newly available international micro price data. Using trade flow data, I test models designed to match these trade price data. Even with significant pricing frictions, the models imply a stronger trade response to exchange rates than found in the data. Moreover, despite substantial cross-sector heterogeneity, differential responses implied by the model find little to no support in the data.

## JEL

F14 F31 F32 E31## Supplementary material

## References

- Adda, J. and R. W. Cooper, 2003,
*Dynamic Economics: Quantitative Methods and Applications.*Cambridge, MA: The MIT Press.Google Scholar - Alessandria, G., 2009, “Consumer Search, Price Dispersion, and International Relative Price Fluctuations,”
*International Economic Review*, Vol. 50, No. 3, pp. 803–829.CrossRefGoogle Scholar - Alessandria, G., J. P. Kaboski, and V. Midrigan, 2010, “Inventories, Lumpy Trade, and Large Devaluations,”
*American Economic Review*, Vol. 100, No. 5, pp. 2304–2339.CrossRefGoogle Scholar - Amiti, M., O. Itskhoki, and J. Konings, 2014, “Importers, Exporters, and Exchange Rate Disconnect,”
*American Economic Review*, Vol. 104, No. 7, pp. 1942–1978.CrossRefGoogle Scholar - Arkolakis, C., J. Eaton, and S. S. Kortum, 2012, “Staggered Adjustment and Trade Dynamics,”
*Mimeo*.Google Scholar - Atkeson, A. and A. Burstein, 2008, “Pricing-to-Market, Trade Costs, and International Relative Prices,”
*American Economic Review*, Vol. 98, No. 5, pp. 1998–2031.CrossRefGoogle Scholar - Balke, N. S., J. Ma, and M. E. Wohar, 2013, “The Contribution of Economic Fundamentals to Movements in Exchange Rates,”
*Journal of International Economics*, Vol. 90, No. 1, pp. 1–16.CrossRefGoogle Scholar - Berman, N., P. Martin, and T. Mayer, 2012, “How Do Different Exporters React to Exchange Rate Changes?,”
*Quarterly Journal of Economics*, Vol. 127, No. 1, pp. 437–492.CrossRefGoogle Scholar - Bernard, A. B., M. Grazzi, and C. Tomasi, 2011, “Intermediaries in International Trade: Direct Versus Indirect Modes of Export,” NBER Working Paper Series, No. 17711.Google Scholar
- Broda, C. and D. E. Weinstein, 2006, “Globalization and the Gains from Variety,”
*Quarterly Journal of Economics*, Vol. 121, No. 2, pp. 541–585.CrossRefGoogle Scholar - Burstein, A. and G. Gopinath, 2014, “Chapter 7—International Prices and Exchange Rates,” in
*Handbook of International Economics*, ed by E. Helpman, and K. Rogoff, G. Gopinath (Elsevier, London), Vol. 4, pp. 391–451.Google Scholar - Bussiere, M., 2013, “Exchange Rate Pass-Through to Trade Prices: The Role of Nonlinearities and Asymmetries,”
*Oxford Bulletin of Economics and Statistics*, Vol. 75, No. 5, pp. 731–758.CrossRefGoogle Scholar - Campa, J. M., and L. S. Goldberg, 2005, “Exchange Rate Pass-Through into Import Prices,”
*Review of Economics and Statistics*, Vol. 87, No. 4, pp. 679–690.Google Scholar - Corsetti, G., and L. Dedola, 2005, “A Macroeconomic Model of International Price Discrimination,”
*Journal of International Economics*, Vol. 67, No. 1, pp. 129–155.CrossRefGoogle Scholar - Corsetti, G., L. Dedola, and S. Leduc, 2008, “High Exchange-Rate Volatility and Low Pass-Through,”
*Journal of Monetary Economics*, Vol.*55*, No. 6, pp. 1113–1128.CrossRefGoogle Scholar - Davis, S. J., J. Haltiwanger, R. Jarmin, J. Miranda, C. Foote, and E. Nagypal, 2006, “Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately Held Firms,”
*NBER Macroeconomics Annual*, Vol. 21, pp. 107–179.CrossRefGoogle Scholar - de Blas, B., and K. N. Russ, 2015, “Understanding Markups in the Open Economy,”
*American Economic Journal: Macroeconomics*, Vol. 7, No. 2, pp. 157–180.Google Scholar - Drozd, L. A. and J. B. Nosal, 2012, “Understanding International Prices: Customers as Capital,”
*American Economic Review*, Vol. 102, No. 1, pp. 364–95.CrossRefGoogle Scholar - Engel, C., and J. Wang, 2011, “International Trade in Durable Goods: Understanding Volatility, Cyclicality, and Elasticities,”
*Journal of International Economics*, Vol. 83, No. 1, pp. 37–52.CrossRefGoogle Scholar - Feenstra, R. C., P. A. Luck, M. Obstfeld, and K. N. Russ, 2014, “In Search of the Armington Elasticity,” Working Paper 20063, NBER.Google Scholar
- Fitzgerald, D. and S. Haller, 2014, “Pricing-to-Market: Evidence From Plant-Level Prices,”
*The Review of Economic Studies*, Vol. 81, No. 2, pp. 761–786.CrossRefGoogle Scholar - Fitzgerald, D., and S. Haller, 2017, “Exporters and Shocks: Dissecting the International Elasticity Puzzle,”
*Mimeo*.Google Scholar - Goldberg, L. S., and J. M. Campa, 2010, “The Sensitivity of the CPI to Exchange Rates: Distribution Margins, Imported Inputs, and Trade Exposure,”
*Review of Economics and Statistics*, Vol. 92, No. 2, pp. 392–407.Google Scholar - Gopinath, G. and O. Itskhoki, 2010, “Frequency of Price Adjustment and Pass-Through,”
*Quarterly Journal of Economics*, Vol. 125, No. 2, pp. 675–727.CrossRefGoogle Scholar - Gopinath, G. and R. Rigobon, 2008, “Sticky Borders,”
*Quarterly Journal of Economics*, Vol. 123, No. 2, pp. 531–575.CrossRefGoogle Scholar - Gopinath, G., O. Itskhoki, and R. Rigobon, 2010, “Currency Choice and Exchange Rate Pass-Through,”
*American Economic Review*, Vol. 100, No. 1, pp. 304–336.CrossRefGoogle Scholar - Gust, C., S. Leduc, and N. Sheets, 2009, “The Adjustment of Global External Balances: Does Partial Exchange-Rate Pass-Through to Trade Prices Matter?,”
*Journal of International Economics*, Vol. 79, No. 2, pp. 173–185.CrossRefGoogle Scholar - Hooper, P., K. Johnson, and J. Marquez, 2000, “Trade Elasticities for the G-7 Countries,”
*Princeton Studies in International Economics*, No. 87.Google Scholar - International Monetary Fund (IMF), 2015, “Chapter 3. Exchange Rate and Trade Flows: Disconnected?,” in
*World Economic Outlook*. Washington, April. Google Scholar - Kilian, L. and R. J. Vigfusson, 2011, “Are the Responses of the U.S. Economy Asymmetric in Energy Price Increases and Decreases?,”
*Quantitative Economics*, Vol. 2, No. 3, pp. 303–316.Google Scholar - Klenow, P. J. and J. L. Willis, 2016, “Real Rigidities and Nominal Price Changes,”
*Economica*, Vol. 83, No. 331, pp. 443–472.CrossRefGoogle Scholar - Landry, A., 2010, “State-Dependent Pricing, Local-Currency Pricing, and Exchange Rate Pass-Through,”
*Journal of Economic Dynamics and Control*, Vol. 34, No. 10, pp. 1859–1871.CrossRefGoogle Scholar - Neiman, B., 2011, “A State-Dependent Model of Intermediate Goods Pricing,”
*Journal of International Economics*, Vol. 85, No. 1, pp. 1–13.CrossRefGoogle Scholar - Obstfeld, M. and K. Rogoff, 2000, “The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?,”
*NBER Macroeconomics Annual*, Vol. 15, pp. 339–390.CrossRefGoogle Scholar - Rauch, J. E., 1999, “Networks Versus Markets in International Trade,”
*Journal of International Economics*, Vol. 48, No. 1, pp. 7–35.CrossRefGoogle Scholar - Ruhl, K. J., 2008, “The International Elasticity Puzzle,”
*Mimeo*.Google Scholar - Schoenle, R., 2016, “International Menu Costs and Price Dynamics,”
*Review of International Economics*(forthcoming).Google Scholar - Santos Silva, J. M. C., and S. Tenreyro, 2006, “The Log of Gravity,”
*Review of Economics and Statistics*, Vol. 88, No. 4, pp. 641–658.CrossRefGoogle Scholar