Giancarlo Corsetti, Meredith A. Crowley, Lu Han 26 August 2019

The value of the UK pound sterling fell dramatically around the Brexit referendum, a 12% decline in just two weeks’ time, and has remained quite weak since then. This has spurred a widespread debate on the effects of depreciation on the competitiveness of British firms. The puzzling news is that UK export volumes have apparently not responded (The Economist 2017, ONS 2017, ONS 2018 De Lyon and Dhingra 2019). 

But did UK firms try and reduce the foreign currency price of their exports after June 2016, taking advantage of the pound depreciation? Or did they prefer to raise their profit (mark-up) per unit without changing prices measured in foreign currency for the foreign customers? While these are classic questions in international economics, the ‘mysterious’ lack of response of UK aggregate trade to a weak currency necessitates the need for a thorough re-examination, informed by the use of firm and product level data. 

In a recent paper (Corsetti et al. 2018), we use daily transaction-level data from HM Revenue and Customs to examine UK export prices before and after June 2016. We start by analysing the UK exporters’ response in the immediate aftermath of the Brexit depreciation, focusing on a time span over which marginal costs can be reasonably considered fixed so that any change in prices can be attributed to mark-up adjustment. We show that the currency of invoicing matters a great deal. We find that export prices measured in foreign currency fell with the exchange rate rapidly and completely only for the trade invoiced in pounds – accounting for about two-thirds of trade transactions, by value. For the remaining share, price competitiveness remained by and large unaffected.

As a second step, we look deeper and ask whether firms ‘priced to market’, i.e. they adjusted prices and mark-ups differently across foreign markets. Using a state-of-the-art methodology, we can distinguish between marginal costs and mark-ups charged in each destination country. We show that firms price to market only when they invoice in the currency of the foreign destination. For trade invoiced in sterling or vehicle currencies (accounting for the vast majority of UK exports), firms do not make destination-specific adjustments in response to changes in local market conditions – suggesting these firms follow a global pricing strategy. 

UK firms are by no means special. Our results on price responses are in line with recent contributions that have emphasised how the exchange rate pass through into prices varies with the currency in which transactions are invoiced (Gopinath et al. 2010, Fitzgerald and Haller 2014, Gopinath 2015, Amiti et al. 2018, Chen, et al. 2019, Bonadio et al. 2019). Relative to the literature, our contribution goes a step further in showing the extent to which price adjustment to the exchange rate depends on market-specific adjustment in mark-ups and profits, as opposed to marginal cost changes. 

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Although the trade share of these transactions invoiced in local currency is small, our study unveils two important empirical facts consistent with the idea that the currency of invoicing is an active choice by exporters. First, firms often use different invoicing currencies in the same destination market. Second, a non-negligible share of firms switches invoicing currency for the same product in the same destination over time. In light of our results above, it seems that firms may prefer to invoice in local currency when they find it profitable to segment their markets across borders, so that they can exploit their local market power to charge different optimal mark-ups in different countries. 

UK export prices and the Brexit depreciation – invoicing currency matters

The short-run export price response to the post-Brexit sterling depreciation is captured in the following three graphs. In each graph, the horizontal axis indicates the number of weeks before and after the Brexit referendum, the vertical axis is the percentage change in the sterling (red) or the UK export price. For clarity, we normalise the bilateral exchange rates and the US average export price in the week of the Brexit referendum to zero. The red solid line represents the movements of bilateral exchange rates. The blue solid line shows the estimates of the price level (in logs) after absorbing idiosyncratic factors that are firm-, product- and destination-specific. The blue dashed lines represent the 95% confidence intervals.

As can be seen in Figure 1, the export price response for sterling-invoiced transactions is close to zero in the four weeks following the referendum – the price in sterling that exporters receive from their sales abroad remains approximately constant. This means that the price measured in the local currency of the importing destination dropped one-to-one with the sterling – an ‘exchange rate pass through’ of close to 100%. A 100% pass through could reflect the fact that sales were contracted before the referendum. Some price response becomes visible starting in the fifth week. However, the magnitude of the price change remains much smaller than the change in the bilateral exchange rate. To the extent that marginal costs, measured in sterling, do not move in the short run, this evidence suggests that firms invoicing in sterling did not adjust their mark-ups in response to currency movements. 

In sharp contrast, the price adjustment to exchange rate changes is much larger when transactions are invoiced in the local currency of destination markets. As shown in Figure 2, in just six weeks’ time, the sterling price movements and exchange rate movements largely align with each other, implying a relatively stable local currency price and thus a substantial increase in the exported product’s mark-up when measured in sterling.

Figure 1 Sterling price responses of sterling invoiced transactions

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Figure 2 Sterling price responses of local currency invoiced transactions 

Most interestingly, the same pattern characterises the responses of prices when firms invoice in a vehicle currency, such as US dollars or euros. As can be seen from Figure 3, sterling prices hardly move in the first four or five weeks but adjust quickly afterwards. In six weeks’ time, export prices (measured in sterling) rise with exchange rates almost one to one. At the 18-28 weeks’ horizon, export prices in sterling have adjusted almost 100% and exchange rate pass through into import prices appears to be close to zero. 

Figure 3 Sterling price responses of dollar-invoiced transactions 

Invoicing in a vehicle versus local currency – does it make a difference? 

While one can argue that in the very short run marginal costs are unchanged, this is less true as we move away from the referendum date. How much of the export price variation measured in sterling can be attributed to mark-up adjustment as opposed to changes in marginal costs?

To shed light on this question, we use the trade pattern sequential fixed effect estimator (TPSFE) developed in Corsetti et al. (2019) to ascertain destination-specific mark-up elasticities. This estimator identifies changes in the component of a firm’s mark-up for a product that is unique to a particular foreign market. In a nutshell, the estimator works by exploiting price variation across export-destination markets after controlling for (a) unobserved marginal costs, (b) the unobserved component of the mark-up that is common across all foreign destinations, and (c) the firm’s endogenous selection of markets.

Table 1 Price and destination-specific mark-up elasticities to exchange rates, 2015-2017

Note: *** indicates the estimate is statistically different from 0 at 1% level.

Table 1 summarises our key findings from applying the TPSFE to weekly price data over a three-year period around the referendum. The first column reports the sterling price elasticity – that is, one minus the exchange rate pass through. The price elasticity of 0.23 for sterling invoiced transactions means that, against a 1% bilateral depreciation of sterling, the sterling price of exports increases by 0.23% – corresponding to an exchange rate pass through of 77%. The estimated price elasticities reflect the pattern highlighted by the graphs – the estimated price elasticities for dollar and local currency-invoiced transactions are both significantly higher than that for sterling-invoiced transactions. 

By while the magnitudes of the price elasticities for the dollar and the local-currency invoiced transactions are close to each other, the relative mark-up adjustments are profoundly different. This is shown in the second column of Table 1. Destination-specific mark-up adjustment is significant only for local currency invoiced transactions – firms take the fall in sterling as an opportunity to re-optimise and tailor their mark-ups to market-specific conditions. Conversely, we detect no destination-specific adjustment for transactions that are invoiced in producer or vehicle currencies, suggesting the price adjustments for sales in these currencies are driven by changes in marginal costs or mark-ups that are however common across destinations. 

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In response to the large sterling depreciation after the Brexit referendum, the data shows a strikingly different pattern of price adjustment across transactions, depending on whether firms invoice in sterling, as opposed to the currency of the destination market or a vehicle currency. Exchange rate pass through is high when firms invoice in sterling, and low otherwise. Mark-up and export price adjustment to local market conditions is significant when firms invoice in the currency of the destination market.

Looking at the share of total transactions by currency of invoicing, we know that nearly two-thirds of the UK’s extra-EU trade is conducted by firms using the pound. Hence, for about two-thirds of foreign trade firms charged significantly lower export prices and became more competitive, whereas exporters accounting for the other one-third actively maintained a stable price in the local currency of the foreign market and, therefore, their competitiveness remained unchanged. 

This evidence makes the lack of response of export volumes all the more puzzling.

Authors’ note: This work contains statistical data from HMRC, which is Crown Copyright. The research datasets used may not exactly reproduce HMRC aggregates. The use of HMRC statistical data in this work does not imply the endorsement of HMRC in relation to the interpretation or analysis of the information.


Amiti, M, O Itskhoki and J Konings (2018), “Dominant Currencies: How Firms Choose Currency Invoicing and Why It Matters,” National Bank of Belgium Working Paper Research 353.

Bonadio, B, A M Fischer, and P Sauré (2019), “The Speed of Exchange Rate Pass-Through,” Journal of the European Economic Association.

Chen, N, W Chung, and D Novy (2019), “Vehicle Currency Pricing and Exchange Rate Pass-Through”, CESifo Working Paper No. 7695. 

Corsetti, G, M A Crowley, and L Han (2018), “Invoicing and Pricing-to-Market: A Study of Price and Markup Elasticities of UK Exporters,” CEPR Discussion Paper no. 13282. 

Corsetti, G, M A Crowley, L Han, and H Song (2019), “Markets and Markups: A New Empirical Framework and Evidence on Exporters from China,” CEPR Discussion Paper no. 13904. 

De Lyon, J, and S Dhingra (2019), “UK Economy Since the Brexit Vote: Slower GDP Growth, Lower Productivity, and a Weaker Pound,” LES Brexit Blogs. 

Fitzgerald, D, and S Haller (2013), “Pricing-to-market: Evidence from Plant-level Prices,” Review of Economic Studies, 81 (2), 761-786.

Gopinath, G, O Itskhoki, and R Rigobon (2010), “Currency Choice and Exchange Rate Pass-Through,” American Economic Review, 100 (1), 304-36.

Gopinath, G (2015), “The International Price System,” NBER Working Paper No. 21646. 

Office for National Statistics (2017), “Statistical Bulletin UK Trade: June 2017,” Figure 8.

Office for National Statistics (2018), “Statistical Bulletin UK Trade: June 2018,” Figure 5.

The Economist (2017), “Sterling’s depreciation has not led to an export boom,” 2 September.