Event Details

Title: The Pass-through of Currency Risk Premia

Abstract: We propose a novel mechanism to explain the incomplete pass-through of exchange rates to exporter prices and quantities, based on the relationship between exporters' dynamic pricing strategies and currency risk premia. When the domestic currency risk premium increases, the relative value of current foreign currency cash flows rises compared to future ones. Consequently, exporters are less inclined to reduce markups today, leading to higher markups in response to increased currency risk premia. This risk-based explanation provides a new perspective on the exchange rate disconnect puzzle, suggesting that higher currency risk premia dampens the direct impact of exchange rate changes on export prices and quantities and lowers the growth rate of exporters. We test this mechanism empirically using firm-product level data from Colombian exporters on quantities and prices.