Testing the Pricing-to-Market Hypothesis: Case of the Transportation Equipment Industry

Lynda Khalaf & Maral Kichian
Pricing-to-market (PTM) theory suggests that monopolistic firms which export adjust their destination-specific markups in reaction to exchange rate shocks. These adjustments limit changes in the price of their exports. Thus, important movements in the bilateral nominal exchange rate between two countries that trade are not necessarily fully reflected in the price of imports. Evidence in favour of PTM has been mostly obtained through hypothesis testing on the OLS, instrumental variable (IV), or single-equation error-correction estimates...
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