A joint test of market power, menu costs, and currency invoicing

Abstract

AbstractThis article investigates exchange rate pass‐through (ERPT) and currency invoicing decisions of Canadian pork exporters in the presence of menu costs. It is shown that when export prices are negotiated in the exporter's currency, menu costs cause threshold effects in the sense that there are bounds within (outside of) which price adjustments are not (are) observed. Conversely, the pass‐through is not interrupted by menu costs when export prices are denominated in the importer's currency. The empirical model focuses on pork meat exports from two Canadian provinces to the U.S. and Japan. Hansen's (2000) threshold estimation procedure is used to jointly test for currency invoicing and incomplete pass‐through in the presence of menu costs. Inference is conducted using the bootstrap with pre‐pivoting methods to deal with nuisance parameters. The existence of menu cost is supported by the data in three of the four cases. It also appears that Quebec pork exporters have some market power and invoice in Japanese yen their exports to Japan. Manitoba exporters also seem to follow the same invoicing strategy, but their ability to increase their profit margin in response to large enough own‐currency devaluations is questionable. Our currency invoicing results for sales to the U.S. are consistent with subsets of Canadian firms using either the Canadian or U.S. currency.