Strategic flexibility and exchange rate uncertainty

We examine the implications of exchange rate swings in international markets, paying particular attention to the importance of firm flexibility. We use the term flexibility to refer to the ease with which firms can respond to exchange rate swings. There are two kinds of flexibility that we consider: (1) flexibility in the timing of output and sales allocation decisions relative to the exchange rate realization; and (2) flexibility in the number of sales outlets available to the firms. We show that differing degrees of flexibility have important implications for equilibrium prices (i.e., exchange rate pass-through), market shares, and profits.

Duke Scholars

Author Corinne M. Krupp Sanford School of Public Policy