Economic Research Insights: Currency Fluctuations, Export Pricing

Economic Research Insights: Currency Fluctuations, Export Pricing, and Macro Policies

Taiwan’s Export Pricing Adjustments to Competitor Currencies

Dominant Currency vs. Competitor FX: A recent study presented at the 2025 Econometric Society World Congress (ESWC) reveals that Taiwanese exporters adjust their prices in response to competitors’ exchange rates despite pricing mostly in U.S. dollars . About 90.6% of Taiwan’s exports are invoiced in USD (similarly 84.5% of Korea’s exports) , yet the exchange rate movements of competitor countries, particularly South Korea, significantly influence Taiwan’s export pricing . In other words, even under a “dominant currency” pricing regime (USD), Taiwanese firms engage in pricing-to-market based on rival currencies.

Impact of Korean Won Depreciation: The research team (led by Associate Prof. Wan-Yu Jeong of University of Birmingham) analyzed 2010–2019 customs data and found a pronounced effect of the Korean won’s value on Taiwan’s export prices. When the Korean won weakens (depreciates), Taiwanese companies tend to cut their USD-denominated export prices by roughly 10% on average . This strategy likely aims to maintain competitiveness in international markets when Korean goods (priced in won) become cheaper. The effect is even stronger for Taiwanese firms whose export product mix closely resembles Korea’s – for these companies, the influence of the won’s fluctuations on pricing was up to 55% greater than normal . This reflects the intense competition between the two economies in similar export categories.

Export Similarity and Role of the Yen: Indeed, South Korea is Taiwan’s most similar export competitor, with an Export Similarity Index (ESI) of 45.54 (the highest among Taiwan’s main competitors) . By contrast, the study found Taiwan’s export prices were less sensitive to the Japanese yen’s fluctuations . One explanation is that a large portion of Japan’s trade is invoiced in yen itself, insulating it somewhat from USD exchange-rate comparisons . Thus, even though Japan is Taiwan’s second-biggest competitor, currency movements in Japan (yen) don’t affect Taiwan’s pricing as much as Korea’s do – likely because Japanese exporters often set prices in yen, reducing direct price competition in USD terms.

Current Developments – Weak Won and Export Strategy: As of August 2025, the Korean won has once again slid past ₩1,400 per USD, reflecting a renewed weak-won trend . On August 23, the won–dollar rate opened at ₩1,400.0 and even touched ₩1,400.5 intraday, the first time breaking 1,400 in about three weeks . This won depreciation, coupled with uncertainty in demand from the U.S., could accelerate Taiwanese firms’ price adjustments in the near term  . In other words, if the won’s weakness persists, analysts expect Taiwan’s exporters may further lower prices to stay competitive, potentially igniting stronger price competition in industries where Korea and Taiwan compete (such as semiconductors, electronics, etc.).

Fiscal Spending: Divergent Effects in Recessions vs. Expansions

Another notable finding at the ESWC comes from Christopher Evans of the IMF, who examined how the impact of government fiscal spending on the economy can vary dramatically depending on the business cycle. The research distinguishes between countercyclical stimulus (government spending increases during a recession) and procyclical stimulus (increases during an expansion) and how firms and consumers interpret these moves.
• Recessionary Periods (Countercyclical Spending): In economic downturns, an increase in government spending appears to send a pessimistic signal to firms about demand prospects. Firms read the fiscal boost as an indication that underlying private demand is weak, and in response they lower their prices (to stimulate sales) . This price reduction leads to an increase in consumer spending (since goods are cheaper) and results in a depreciation of the real exchange rate . In simple terms, during recessions a fiscal expansion tends to “crowd in” consumption and makes the currency relatively weaker in real terms. This aligns with Evans’ panel-data evidence that in countries with countercyclical fiscal policy, government spending shocks have expansionary effects on consumption and cause real currency depreciation .
• Expansionary Periods (Procyclical Spending): In contrast, if governments raise spending during a boom or expansion, firms do not perceive an urgent boost to demand – rather, it might be seen as overheating. In such cases, the stimulative effect on consumption is limited . With demand already strong, firms may even keep prices higher, and the additional government spending can lead to a relative real appreciation of the currency . In Evans’ terms, when fiscal policy is procyclical, the usual consumption increase from spending is weaker, and the real exchange rate tends to appreciate instead . Essentially, expansion-phase stimulus can “crowd out” private consumption and strengthen the currency (as markets expect tighter future policy or higher interest rates). These outcomes support the idea of an “information channel” of fiscal policy: government spending shocks inform price-setters about the state of the economy, altering their pricing behavior and thus influencing consumption and exchange rates .

In summary, the effect of fiscal stimulus on the economy and currency is state-dependent. Policymakers should be aware that the same fiscal boost can have opposite effects on consumer prices and exchange rates, depending on whether the economy is in a slump or a boom.

Strong Dollar and Exporters’ Profitability: The Dividend Factor

A third piece of research (by Ko Dong-gyun of Sogang University) investigated why Korean export companies’ profit margins have not deteriorated in the recent “strong dollar” environment. Typically, a strong USD (and correspondingly weak KRW) is a double-edged sword for Korean firms: it makes exports cheaper abroad (boosting sales) but also raises costs for any imported inputs and can hurt terms of trade. Yet, many Korean exporters have remained resilient or even improved profitability during the latest bout of USD strength.

Key Finding – Overseas Dividends: The study finds that dividend repatriation from overseas subsidiaries has played a pivotal role in supporting Korean parent companies’ earnings during the strong-dollar period . When the dollar is high, profits earned by foreign subsidiaries (often in USD or other currencies) convert to larger amounts of Korean won. Korean multinationals benefited by bringing home these overseas earnings as dividends. The incoming funds boost the cash flow of the domestic parent companies and increase their cash reserves . This improved liquidity has enabled firms to sustain or expand capital investment and productivity, offsetting potential margin pressures . In essence, globalized companies used foreign profits (enhanced in value by the strong dollar) to shore up domestic operations. This explains why, contrary to the old belief that “strong dollar = export windfall” (which isn’t universally true), many exporters saw stable or improved profitability: the currency effect was neutralized or outweighed by financial inflows from abroad. It’s an interesting insight into corporate finance – highlighting the importance of overseas assets and profit repatriation in a volatile forex climate.

Rethinking the Individual Choice Model: Samuelson’s Keynote

Finally, the ESWC 2025 conference concluded with a provocative keynote by Larry Samuelson, a Yale professor and then-president of the Econometric Society. Samuelson called for a fundamental reexamination of the standard “individual choice model” that underpins much of microeconomics and, by extension, macroeconomic theory . He argued that the classical framework—assuming fully rational individuals with fixed preferences operating under known constraints and updating beliefs correctly—has critical shortcomings when confronted with reality.

Four Core Elements Under Scrutiny: Samuelson identified four key components of the individual choice model and explained how each is incomplete or flawed , requiring new theoretical development:
• Preferences: In textbook economics, an individual’s preferences are usually represented by a well-behaved utility function (often expected utility for choices under uncertainty). Samuelson noted that this approach fails to distinguish between different aspects of preference, such as the intensity of desire (e.g. the diminishing satisfaction from each additional cup of coffee) versus attitudes toward risk . Current models conflate risk aversion with marginal utility in a way that doesn’t capture reality. He suggests we need new models that can separate these aspects – for instance, to explain why the utility gain from the first cup of coffee is much higher than the fourth, while also accounting for an individual’s risk preferences .
• Feasible Set of Choices: The model assumes individuals know their feasible set – all options they can actually choose. In reality, the range of choices can be constrained or expanded by factors not well captured (like limited attention, complexity of options, or institutional restrictions). Samuelson implies that what people perceive as “actually possible” choices may differ from the economist’s abstract set, and this needs deeper exploration (though details of his remarks on this point were not fully reported in the snippet).
• Probabilistic Beliefs about the Future: Standard theory often assumes people have a single subjective probability distribution over future events (and many models assume these beliefs are homogeneous across individuals). Samuelson pointed out that heterogeneity in beliefs is the norm, not the exception . In reality, different individuals (investors, policymakers, everyday consumers) hold different models and beliefs – one person trusts fundamental analysis, another follows news or social networks, another relies on technical patterns . The traditional model, which typically assumes common knowledge or identical beliefs, cannot account for the interactions and trades that occur when people strongly disagree. Samuelson argued that we need new theories to explain interactions under diverse beliefs, as these can lead to market outcomes and trades that wouldn’t occur if everyone thought the same .
• Information Updating (Learning): The classical individual choice model usually assumes Bayesian updating – agents update their beliefs rationally when new information arrives. Samuelson highlighted that actual human learning often deviates from Bayesian perfection . People face cognitive limits, or they might cling to prior beliefs (confirmation bias), or find it impossible to process complex data correctly. Sometimes new information even leads to worse confidence due to distorted prior beliefs . He stressed that learning is not just a straightforward Bayes’ rule application; it matters how people frame the world and what models they choose to interpret information . Thus, economics needs to incorporate richer models of learning and belief formation.

Samuelson also questioned the traditional notion of efficient markets when people have different beliefs. Trade arising from genuine differences in preferences is mutually beneficial, but if trades occur because of differing misbeliefs or misinformation, can we really deem them efficient? He suggested this is debatable  and proposed rethinking what “efficiency” means in such contexts.

Call for New Theory: The overarching message was that economics must reinforce its foundations (“tend to its roots”) by updating the individual choice model to better reflect reality  . Samuelson encouraged the development of theories that embrace diverse preferences, heterogeneous beliefs, and more realistic learning processes rather than relying solely on the idealized rational actor model . By doing so, economics can improve its descriptive accuracy and policy relevance. He expressed hope that this line of inquiry would lead to more robust models and better policy analysis in the future . In his words, only by moving beyond a “single model of rationality” and incorporating the rich tapestry of how people actually decide – with different beliefs and ways of learning – can economics inch closer to reality .

Conclusion: Over the five-day conference, these diverse insights – from Taiwan’s export pricing strategies and exchange-rate competition, to the nuanced effects of fiscal policy, the financial resilience of exporters through global operations, and foundational theory debates – all underscore the complexity of today’s economic landscape. Currencies and expectations play a crucial role in shaping outcomes, and both empirical analysis and theoretical frameworks are evolving to keep up. The ESWC 2025 highlighted the importance of understanding strategic behavior (by firms or policymakers) under changing conditions, and the need to sometimes rethink core economic assumptions in light of new evidence  .

Sources: The information above is drawn from reports on the ESWC 2025 conference and related research findings, including Seoul Economic Daily  , the IMF working paper by Evans et al. , and coverage of Larry Samuelson’s keynote in Edaily  . These provide detailed context for each of the points discussed.