How linear is pricing-to-market? Empirical assessment of hysteresis and asymmetry of PTM

Abstract

Pricing decisions of exporters who are facing imperfect competition in their destination markets might depend on exchange rate changes. While empirical literature often assumes that the impact of the exchange rate on the exporters’ prices is linear and the markup adjustment does not depend on magnitude or direction of the exchange rate change (or allows for short-run asymmetries only), we question this statement and test for the long-run hysteresis and asymmetry of pricing-to-market (PTM). Using the German export beer market as an example, we show that both types of nonlinearities play an important role in PTM decisions.