Exchange-Rate Pass-Through in International Production Networks

The paper presented in this Mannheim Applied Seminar studies exchange rate pass-through in international trade transactions, focusing on the role of supplier-buyer relationships and their bilateral bargaining power within production networks. Using detailed microdata on Swiss cross-border trade from 2014–2023, the authors demonstrate that pass-through is lower for important suppliers within a buyer’s network. This lower ERPT arises from higher average markups absorbing exchange rate fluctuations and from invoicing in the buyer’s currency. Both channels contribute equally to the observed differences driven by bilateral bargaining power. The results provide empirical evidence for a significant role of bilateral market power and network structure in shaping pass-through, extending the understanding of its determinants beyond conventional factors such as unilateral currency choice and industry-level market share.