Chapter 6 Conclusion
This paper explores the degree to which exchange rate fluctuations are absorbed into the New Zealand dollar-converted unit values received by exporters.
In the short run, estimated ERPT appears to be intrinsically related to the invoice currency. Firms invoicing in producer currency on average adjust the New Zealand dollar prices of their goods to reflect only 9 percent of the exchange rate fluctuation, with the remaining 91 percent being passed through to the importer. In contrast, when firms invoice in local or vehicle currencies, price rigidities in the invoice currency mean that the exporter absorbs a much greater share of the exchange rate fluctuation into their NZD-converted return - 90 percent for local currency invoicers and 70 percent for vehicle currency invoicers (or 83 percent of the variation in the NZD/vehicle currency exchange rate). These results are closely comparable to those of Gopinath et al. (2010), implying that the ERPT behaviour of New Zealand exporters to all countries is almost identical (on average) to that of exporters from all countries to the US.
Invoicing behaviour differs substantially across firms. In particular, firms with relatively high past exports, those that export to more countries, and those that utilise a greater number of currencies are more likely to invoice in either local- or vehicle-currencies. As a consequence of stickiness in the invoice currency, changes in their received unit values are therefore more closely related to changes in bilateral exchange rates. Conversely, producer-currency invoicing is more common among foreign-owned firms and exporters of differentiated products, leading to a milder average impact of exchange rate changes on received unit values for these groups. When currency choice is directly controlled for, firm characteristics cease to show any relationship with pass-through. These findings provide evidence as to the mechanism through which "high-performing" firms give effect to the lower rates of pass-through to importers (higher βs) observed by Berman et al. (2012) - lower short-run pass-through is directly associated with higher usage of foreign currencies.
In the long run, the role of stickiness in the invoice currency weakens and NZD-denominated returns absorb a lower overall proportion of the exchange rate change. While received unit values of local-currency pricers still respond quite strongly to the bilateral exchange rate (β = 0.672), vehicle-currency pricers become indistinguishable from producer-currency pricers with long-run changes in received unit values reflecting only 23 and 17 percent of the exchange rate change, respectively. Increasing pass-through to foreign prices, combined with a higher share of producer-currency invoiced observations leads to a substantial reduction in the average impact of exchange rates on received unit values in the long run. However, despite these adjustments, pass-through remains low among some groups of firms (particularly those invoicing in the local currency) suggesting that in the absence of offsetting effects (eg, changes in costs) long-run exchange rate movements will impact upon exporter profitability. The implied variability in export returns increases the risks associated with exporting, which may in turn reduce firms' incentives to enter and develop export markets.
