| This paper explores the hypothesis that the unresponsiveness of export pricing to exchange rate fluctuations may be partially the result of hedging activities trading agents engage in to eliminate exchange risk. In searching for answers to the incomplete pass-through phenomenon, the "new trade theory" has incorporated an industrial organization approach into pass-through studies at the product level. The new direction offered not only rich insight into the determination of exchange rate pass-through, but has also created more puzzling results. The present study argues that the pass-through issue is also governed by a firm-specific factor, i.e. hedging, in addition to the well-known ones, such as market share, product differentiation and market structure. Hedging against exchange rate uncertainty has an important effect on the structure of pass-through relation---a reduction in the exposure of currency conversion risk. This reduction leads to a decline in the "willingness," rather than the "ability," to pass the cost shock to consumers. The study investigates U.S. data on exports from 111 4-digit SIC manufacturing industries to 69 destination countries over the 1974 to 1996 period to show that hedging activities against exchange rate risk decrease the degree of passthrough to U.S. dollar export prices. |
