Pass-through and Export Prices: an empirical test for the leading European countries

The paper presents an empirical investigation of the extent to which exchange rate movements affect export prices in the leading European countries. By extending the model proposed by Kasa (1992) to a context of monopolistic competition, an export price equation has been derived that allows us to clearly identify the effects of nominal exchange rate movements on the exporters' profit margins and therefore on his prices. This equation has then been estimated with reference to five different products (beer, car tyres, truck tyres, aluminium foil and cars) and six markets (United States, Germany, France, Italy, United Kingdom and Spain). The results show that the pass-through is more likely to occur and larger in absolute value for the less differentiated products, for which markets can plausibly be assumed to be more competitive. In line with previous empirical findings, the German and US markets are the ones in which it is most difficult for exporters to modify their prices expressed in local currency.