This article developed a theoretical ERPT framework accounting for menu costs and different choices of currency for
invoicing purposes. Menu costs make it costly for exporters to revise their prices in response to exchange rate changes. This introduces a nonlinearity between the exchange rate and the export price. This nonlinearity motivates the empirical specification of a two-regime pass-through model to analyze the pricing decisions of pork exporters from two Canadian provinces to the U.S. and Japan. The choice of currency used for invoicing purposes imposes theoretical restrictions on the pass-through in the first regime (i.e., when menu costs are high relative to the profits arising from a price change) which can be tested empirically. The empirical model rejects the null hypothesis of no menu costs in three of the four equations. Statistically significant menu costs are identified in the export pricing decisions of Quebec and Manitoba exporters in their dealings with U.S. buyers. Manitoba pork exporting firms also appear to face menu costs in their dealings with Japanese buyers. We argue that the nonrejection in the case of the Quebec–Japan ERPT equation is more likely attributable to the small length of our sample than to the actual significance of menu costs faced by Quebec firms. Overall, the empirical evidence favors threshold pass-through models over linear ones.

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