Exchange rates fluctuation and firms' globalization activities

Abstract

The thesis focuses on the how firms’ globalization activates adjust to exchange rates fluctuations, including both realized and expected fluctuations. In Chapter 1, it presents theory and evidence on that import responses to exchange rate movements with micro evidence from a highly disaggregated data of Chinese imports from OECD countries. Import adjustment exists at both extensive and intensive margins, which are more profound for ordinary trade than for processing trade. Under the exchange rate reform, import responses vary under different exchange rate regimes (including a fixed exchange rate regime, an expected appreciation regime, and a confirmed appreciation regime). Finally, it finds that the declining pattern of exchange rate pass-through into import prices. In Chapter 2, it presents theory and empirical evidence on that a forward-looking potential importer facing sunk costs will respond to the expectation of future exchange rate fluctuations. Building upon a heterogeneous-firm framework, the model makes a variety of predictions about responses to anticipated exchange rate changes, including an extensive margin dominated pattern, a diminishing time pattern and etc. Using disaggregated transactional level data of Chinese imports from the United States combined with data on the US dollar-RMB future rates on the non-deliverable forward market, it finds empirical evidence to support those predictions. In Chapter 3, it shows that pricing behavior of exporting firms display a “forward-looking” nature due to the existence of sticky price. It offers a channel for the expectations of future exchange rates to affect current export prices at both firm and product level. By exploring bilateral trade data between the United States and China, it finds that export prices significantly respond to forward premiums at the firm-product level. At the product level, not only current (and past) exchange rate fluctuations, but also future exchange rate changes, are found to pass-through into import prices. These findings provide a new perspective to reveal the “micro-foundation” for the partial exchange rate pass-through phenomenon.

Date of Award	2015
Original language	English
Awarding Institution	The Hong Kong University of Science and Technology