Pass-through and Exposure


  • Gordon M. Bodnar,

  • Bernard Dumas,

  • Richard C. Marston

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    • Bodnar is from Johns Hopkins University, Dumas is from INSEAD, and Marston is from the University of Pennsylvania. Bodnar has a secondary affiliation with the University of Pennsylvania; Dumas with the University of Pennsylvania, the NBER, and the CEPR; and Marston with the NBER. We would like to thank George Allayannis, Jose Campa, Richard Green (editor), Michael Knetter, René Stulz, two anonymous referees, and participants in seminars at Dartmouth, the London School of Economics, New York University, the New York FRB, Princeton, Wharton, and the 1997 NBER Summer Institute for their comments. The paper was also presented at the 1998 AFA meetings in Chicago. Dumas acknowledges the financial support of the HEC School of Management, and Marston acknowledges the support of the George Weiss Center for International Financial Research.


Firms differ in the extent to which they “pass through” changes in exchange rates into foreign currency prices and in their “exposure” to exchange rates—the responsiveness of their profits to changes in exchange rates. Because pricing affects profitability, a firm's pass-through and exposure should be related. This paper develops models of exporting firms under imperfect competition to study these related phenomena. From these models we derive the optimal pass-through decisions and the resulting exchange rate exposure. The models are estimated on eight Japanese export industries using both the price data pass-through and financial data for exposure.