Importer dispersion and exchange rate pass‐through

Abstract This paper examines the impact of importer dispersion on exchange rate pass‐through. Theoretically, we demonstrate that greater importer dispersion – characterized by larger variations in import size across importers – leads to higher demand elasticity and lower exporter markups, thereby resulting in greater exchange rate pass‐through. Using transaction‐level customs data from Colombia, we provide robust empirical evidence supporting this prediction. The quantitative effect of importer dispersion on exchange rate pass‐through is significant: the importer dispersion channel is at least as important as the traditional exporter heterogeneity channel. Our results are robust to various empirical specifications and become even stronger in the context of the dominant currency paradigm.