Gravity Models and Asymmetric Exchange Rate Effects: Insights from German Beer Exports

Abstract

Recent developments in trade literature suggest that in the presence of strategic pricing in some markets and an incomplete exchange rate pass-through resulting from it, the standard gravity model has to be augmented with an exchange rate variable. As symmetry of pass-through has been questioned in new pricing-to-market (PTM) studies, we argue that this asymmetric impact of the exchange rate on trade should be explicitly modeled within the gravity framework. This consideration of asymmetric effects of exchange rate appreciations and depreciations on export values and quantities might provide insights into the driving forces of PTM in a particular market (or group of markets) given that the existing literature emphasizes two main hypotheses that explain the occurrence of an asymmetric PTM (market share hypothesis and marketing bottleneck hypothesis). In this paper, we propose a way to integrate individual (asymmetric) long-run effects of currency appreciations and depreciations on trade flows into the gravity model and empirically investigate which of the driving forces is relevant for the case of German beer exports. PTM studies often argue that the market share protection is a reason for local currency price stabilization mechanisms applied in the most important markets. Yet, the results of our analysis reveal that this might no longer be the case when all trading partners are considered. [EconLit citations: C33; F14; L66]. C 2016 Wiley Periodicals, Inc.

Analyzing determinants of US distillers dried grains with solubles exports

“…The PPML method, proposed by Silva and Tenreyro (), has been suggested as an estimation method to account for the specification issues of the gravity equation. The PPML method has been widely used in the literature (e.g., Anderson & Yotov, ; Anderson, Larch, & Yotov, ; Burger et al, ; Dreyer & Fedoseeva, ; Ghazalian, ; Philippidis, Resano‐Ezcaray, & Sanjuán‐López, ) since the estimator is consistent in the presence of heteroskedasticity in the error term, and addresses zero values of the dependent variable in the level‐log form (Silva & Tenreyro, ). In addition, PPML performs well in small samples (Westerlund & Wilhelmsson, ).…”

“…The gravity model is a commonly used approach to understand the determinants of trade flows on agricultural commodities among different countries (e.g., Davis, Muhammad, Karemera, & Harvey, ; Dreyer & Fedoseeva, ; Kafle & Kennedy, ; Kandilov, ; Serrano & Pinilla, ; Zahniser, Pick, Pompelli, & Gehlhar, ). The gravity model predicts that trade flows between two countries are directly proportional to their market size, which is normally measured by gross domestic products (GDP) and population, and inversely proportional to their distance, which is a proxy for transportation costs (Gómez‐Herrera, ).…”

Export Demand for Thailand's King of Fruit

“…Examples are as follows. Castillo et al (2016) adopted bottled and bulk wine export of the nine significant countries that operated in the global wine market to 14 importers; Dreyer and Fedoseeva (2016) adopted German beer exports to 167 countries. De Matteis et al (2018) adopted US distillers dried grains with solubles exports to 29 countries.…”