The narrow goal of this project is to document how exporters and potential exporters in a small open economy respond to exchange rate changes. The project will explore firms' responses both in terms of pricing of home sales versus exports, and in terms of participation and sales in domestic and export markets. The project will make use of a unique proprietary data set that merges the plant census for Ireland (a small open economy) with the survey of prices used to construct the producer price index. The first stage of the project involves merging and cleaning the data. The second stage of the project investigates the extent and nature of pricing-to-market and the significance of price stickiness among a particular group of exporters. Preliminary results are suggestive of slow passthrough of exchange rate changes into import prices. Given evidence of more rapid passthrough at higher levels of aggregation, this suggests that entry and exit of products and exporters may be crucial to understanding real exchange rate movements. The third stage of the project investigates the response of participation and sales in home and export markets to movements in exchange rates. Intellectual merit: The novelty of this project lies in the unique features of the data set. For the purpose of identifying pricing-to-market and pricing behavior, we know that the products we focus on are actually traded, rather than potentially traded. We measure prices in home and export markets from the producer’s perspective, and we can be certain that we are comparing prices for products produced in the same plant. This gives us a clean identification strategy. Relative to other work on entry, exit and quantity responses of exporters to exchange rate changes, we have access to panel data on sales to some export destinations for the full population of plants rather than just a sample of larger plants. Broader impacts: The broader objective of the project is to understand the microeconomic interactions that underly the behavior of real exchange rates at the macro level. The results of the project described here will contribute to our understanding of passthrough of exchange rate changes into import prices and the simultaneous dynamics of import behavior, which form an important transmission channel of monetary and exchange rate policy. The project at hand does not focus on the US, but on the case of exporters in a small open economy (Ireland) exporting to a bigger economy (the UK). This case is particularly relevant to understanding why depreciation of the dollar has seemed to have little impact on import prices and overall imports in recent times, because the competitive position of foreign firms selling in the US market is likely to be very comparable to that of the firms in the data
