Intra-EAC Trade Volatility in Real Exchange Rates

We use a large sample of export transactions from customs files across six developing countries and several years to explore the extent of pricing to market and volume responses to exchange-rate variations in the East African Community (EAC), a customs union, and a control group of exporters from developing countries outside the region. We find that, relative to the control group, EAC exporters seem to have a stronger ability to price to market on the CU market, suggesting the existence of market power. This market power does not seem to relate to usual proxies for firm size, but is more marked for manufactured products. We also find that the supply (volume) response to exchange-rate variations is more subdued for EAC exporters than for the control group, suggesting the existence of supply constraints.

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