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Description:
This paper uses firm-product-destination level trade data from Hungary linked to Eurostat data on unit values and quantities in production, imports and exports of products in EU member states to see how firms react following price and exchange rate changes in their export markets. The results show that exchange rate pass-through is similar to that found in other countries, but the elasticity with respect to changes in the market price is only about a precisely estimated 0.02, suggesting that firms adjust their markups very differently following exchange rate and price shocks. In addition, quantity reaction after a change in the market price is quite small, suggesting a very low residual demand elasticity. Regarding heterogeneity, the paper finds that exchange rate pass-through is more incomplete for larger firms, while reaction to price changes is stronger for products which Hungary competes with low price competitors. These results are not easy to explain in a flexible price model, but can be in line with multi-year contracts which handle different shocks differently.