A Pass‐Through Revival

It has been found that the pass‐through of the exchange rate and import prices to domestic prices has weakened over time. The most recent research, however, shows that this trend may have been reversed. Recent studies have applied various time series methods to the Japanese data, and estimated responses of domestic prices to the exchange rate and import prices in different time periods. Those studies have found signs that pass‐through has made an impressive comeback since the early 2000s. This paper reviews the most recent evidence and discusses its policy implications. I argue that the exchange rate has likely regained its status as an important transmission mechanism of monetary policy to domestic prices.     

EXCHANGE RATE PASS‐THROUGH INTO RETAIL PRICES

We study exchange rate pass‐through and its determinants using scanner data on fast moving consumer goods sold by 1,041 outlets in the United Arab Emirates between 2006 and 2010. The data are augmented with country of origin information. Our main finding is that exchange rate pass‐through varies more across retailers within regions than across regions, and in particular that pass‐through increases with retailer market share. We also find that exchange rate pass‐through is negatively correlated with both product quality and the elasticity of substitution of the product category and positively correlated with the frequency of price adjustment.     

Exchange Rate Pass‐through: The Role of Regime Changes

We consider the effect on the degree of exchange rate pass‐through of the exchange rate regime in operation. We test the hypothesis that pass‐through will be lower under a float as firms may be reluctant to pass appreciations or depreciations on to their customers when there is a strong chance that they will be subsequently reversed. Taylor’s hypothesis that pass‐through will be lower in a low‐inflation environment is also considered. Both hypotheses are assessed in relation to the price of manufactured imports into New Zealand and we find that, whereas the shift to a float dramatically lowered the degree of pass‐through, the later shift to a low‐inflation regime has no significant additional effect on the pass‐through relationship.     

Do central banks respond to exchange rate movements? Some new evidence from structural estimation

This paper investigates the impact of exchange rate movements on the conduct of monetary policy in Australia, Canada, New Zealand, and the United Kingdom. We develop and estimate a structural general equilibrium model, in which monetary policy is represented as a simple rule and exchange rate pass‐through is incomplete due to the presence of local currency pricing and distribution services. We find that the Bank of Canada, the Reserve Bank of New Zealand, and the Bank of England have not adjusted interest rates in response to exchange rate movements since the adoption of inflation targeting, while our model selection results for Australia are less clear.     

Trade Costs and the Open Macroeconomy

Trade costs are known to be a major obstacle to international economic integration. Following the approach of New Open Economy Macroeconomics, this paper explores the effects of international trade costs in a micro‐founded general equilibrium model that allows for different degrees of exchange rate pass‐through. Trade costs are shown to create an endogenous home bias in consumption and the model performs well in matching empirical trade shares for OECD countries. In addition, trade costs reduce cross‐country output and consumption correlations, and they magnify exchange rate volatility. Trade costs turn a monetary expansion into a beggar‐thy‐neighbor policy.     

SECTORAL EXCHANGE RATE PASS-THROUGH: TESTING THE IMPACT OF POLICY REFORMS IN INDIA

This paper analyses the impact of India's policy reforms on exchange rate pass‐through into import and export prices, using panel data (at one‐digit SITC level) for pre‐ (1980–90) and post‐reform (1991–2001) periods. While the pass‐through into import prices has declined, the pass‐through into export prices (in USD terms) has increased during the 1990s. The results suggest that, relative to rupee depreciation, Indian exporters increased their USD prices around 20% in the 1980s, but decreased them by around 70% in the 1990s. Moreover, the number of sectors exhibiting some degree of pass‐through increased in the 1990s (six), relative to the 1980s (three). These changes may be attributable to the elimination of currency and trade controls, which increased competition among firms and fostered a concern with market share gains in the 1990s over an attempt to use depreciations to increase profits in the 1980s.     

Export Subsidies and Exchange Rate Pass‐through

This paper investigates effects of exchange rate on optimal trade policies and market prices within a standard export subsidy model. Shifts in exchange rate change relative efficiencies of firms in different countries. We show that depreciation of own currency increases subsidy levels when marginal cost is constant. Import dependency weakens this relationship, decreasing sensitivity of subsidy levels to depreciation. In general, subsidies reduce exchange rate pass‐through. Additionally, perverse exchange rate pass‐through effect arises with sufficiently intensive subsidies.     

Exchange rate uncertainty and firm investment plans evidence from Swiss survey data

A sudden change in monetary policy happened in Switzerland on January 15th, 2015. The Swiss National Bank removed the lower exchange rate bound vis-à-vis the Euro. We believe that uncertainty concerning a vital economic indicator as the exchange rate should influence economic activities. We argue that the unexpected removal of the lower bound induced a temporary uncertainty about future prices in foreign markets and believe that this influenced firm investment in the short term. We exploit the unexpected change in monetary policy as a natural experiment and use the continuous nature of business tendency surveys to determine the role of uncertainty in the immediate aftermath of the event. Changes in firm-level expectations are measured by specially designed survey questions. We use this information to disentangle first and second moment effects. We find that uncertainty negatively affects investment in equipment and machinery through real-option effects and believe that uncertainty positively influences expenditures in research and development through growth-option effects. Finally, we argue that focusing on aggregate gross fixed capital formation masks important insights and suggest the use of disaggregated investment data in future research on the relationship between uncertainty and investment.     

Export rivalry and exchange rate pass‐through

In this paper, we investigate the influence of market rivalry on firm‐level exchange rate pass‐through. Similar to Bloom et al. Econometrica, 80 , 1347–1393 (2013), we define market rivalry as product market proximity, and expect the cross market spillovers, that is, through leaked information or reputation, to affect firm‐level export price. Using a comprehensive dataset from Chinese exporters for the 2000–2007 period, we find that in response to a higher degree of market rivalry firms are less responsive to exchange fluctuations. This unresponsiveness suggests a higher degree of exchange rate pass‐through. The influence of market rivalry is stronger among firms that export consumption and heterogeneous products, and to developed countries. Our results are robust to different measures of market rivalry and specifications.     

MONETARY CREDIBILITY VS. VOTER APPROVAL: POLITICAL INSTITUTIONS AND EXCHANGE‐RATE STABILIZATION DURING CRISES

This paper analyzes how political institutions affect the execution of exchange‐rate policy. By focusing on policy‐makers' responses to the emergence of speculative pressure on their currencies, we argue that the effect of democratic institutions on exchange‐rate stability is likely to be conditioned by the officially announced exchange‐rate regime. Officially fixed exchange rates are the main instrument of autocrats to signal commitment to long‐term stability. Autocratic governments with strictly fixed exchange rates are thus more likely to defend their exchange rates than autocrats with an intermediate regime because the latter implicitly signal that they care less about monetary stability. In contrast, democrats defend more often in intermediately than in fully fixed official regimes by using a combination of external and internal adjustments, which reduce the negative effects of a devaluation on voters. Our analysis of 189 currency crises between 1975 and 1999 supports this conditional effect.     

人民币升值的逆传递效应： 基于供给冲击和需求冲击的分析

基于供给冲击与需求冲击的研究视角,本文阐述了人民币升值的逆传递效应的传导机制。运用协整与向量误差修正模型,实证检验了人民币名义有效汇率与人民币对美元的双边名义汇率的逆传递效应。结果表明,无论在长期还是在短期,人民币升值都不具有通货紧缩效应,而是具有逆传递效应,并且名义有效汇率的逆传递效应强于双边名义汇率。     

Exchange rate expectations and economic policy uncertainty

This study provides a new angle on the relationship between political decisions and exchange rates. We link a conventional exchange rate modeling approach to the literature on the political economy of exchange rates and studies dealing with the role of policy announcements for financial market expectations by addressing the impact of policy uncertainty on exchange rate expectations and forecast errors of professionals. Our results show that expectations are not only affected by announcements but also by the degree of uncertainty regarding the future stance of economic policy. We find that forecast errors are strongly affected by policy uncertainty compared to expectations, suggesting that the effect of uncertainty is not efficiently accounted for in market expectations. Our main findings hold for economic policy uncertainty, fiscal policy uncertainty and monetary policy uncertainty. In addition, the estimates for the Japanese yen suggest a safe haven role of the yen since higher policy uncertainty in the US results in an expected appreciation of the yen.     

汇率-资本流动性的制度安排和财政-货币政策的有效性研究

笔者通过拓广的蒙代尔-弗莱明模型,并突破了传统的"三元冲突"汇率制度安排理论的研究路径,考虑引入资本流动性相对强度系数的概念,又在固定汇率制下引入"冲销"干预政策因素,提出了一个在固定和浮动汇率及不同资本流动性制度安排下财政-货币政策有效性指数曲线的新假说,对汇率-资本流动性制度安排对于宏观经济政策(财政-货币政策)综合有效性的影响问题做了一些较为深入的探讨.笔者认为,我国作为一个经济大国应尽可能地拥有宏观经济政策的自主权,考虑到我国当前金融市场体系尚不够完善,货币政策传导机制还存在严重障碍,所以在近期财政政策的权重应大于货币政策,从而在我国汇率制度改革过程中,为保留宏观经济政策的自主权,在加快放宽人民币汇率弹性的同时必须加强相应的资本管制.     

Consumer arbitrage in cross‐border e‐commerce

In today’s internet markets consumers can search for, find and compare prices worldwide. Online, information circulates faster than offline and arbitrage opportunities such as the ones arising from currency shocks are easily unveiled. In this paper, we estimate for the first‐time exchange rate elasticities for cross‐border e‐commerce transactions. Exploiting a new high‐frequency database on international transactions of parcels, we find that a 1% appreciation of the domestic currency increases e‐commerce imports by 0.7%. Comparing the result with traditional estimates in offline markets, this implies a 50% exchange rate pass‐through online.     

The First and Second Stage Pass‐through of Exchange Rates: A Developing Country Perspective

This paper investigates the validity of the conventional wisdom that, unlike in developed countries, exchange rate pass‐through (ERPT) should be ‘complete’ for developing economies. To test this hypothesis, we construct new variables as well as original data sets, which are not readily available in the literature, and employ an alternative error correction model technique for a typical small open developing economy—Bangladesh. The transmission of exchange rate movements to import prices is found to be ‘complete’; however, the ‘second stage pass‐through’ is ‘partial’ both in the short and long run. The response of traded goods prices to exchange rate shocks is found to be significant and larger in the long run compared with the short run. Trade liberalization is also a significant phenomenon for ERPT. The analysis has wider applicability to other small open economies.     

预期作用下人民币汇率对出口价格的非线性传递效应研究

对外贸易中贸易款项的支付大多数都在远期,因此对未来汇率变化幅度的预期,会影响汇率对出口价格的传递效应,从而导致汇率传递出现非线性特点。本文对此进行了理论分析,结果显示,预期未来汇率变化幅度较大时,汇率对出口价格的传递程度会下降甚至可能出现负向传递。实证部分本文使用STR模型分析了1999年1月—2016年7月在汇率预期的作用下人民币汇率对出口价格的传递效应。研究发现当人民币汇率预期变动幅度较小时,汇率传递系数为正,人民币汇率升值会导致出口价格上涨,贬值导致出口价格的下降。但是当人民币预期汇率的变化幅度达到一定的阈值后,人民币汇率升值会导致出口价格下降,而贬值会导致出口价格上涨。因此货币当局有必要关注汇率预期尤其是大幅度汇率变化预期的存在对进出口价格和需求的影响。     

Exchange rate risk and trade mode choice in processing trade: Evidence from Chinese data

This study investigates the impact of exchange rate fluctuations on the trade mode choices of assembly firms. Using Chinese customs data, we show that exchange rate pass‐through (ERPT) depends on which party is responsible for sourcing inputs. Relative to passively receiving inputs under the pure assembly (PA) mode, foreign‐invested assembly firms mainly source inputs themselves through the import and assembly mode and enjoy lower ERPT. We find that the share of imports through PA increases with exchange rate fluctuations. This effect is more pronounced for firms in liquidity‐constrained industries and mitigated by better local financial development.     

Monetary and banking policy transmission through interest rates: an empirical application to the USA,Canada, the UK and the Eurozone

The main purpose of this paper is an examination of the pass‐through interest rate transmission from the wholesale rates (central bank and/or money market rates) to the retail rates (deposit and lending rates) of the banking system. Knowledge of the transmission substantially helps us to calculate the pass‐through interest rate margin or mark‐up in the banking systems under examination (USA, Canada, the UK and the Eurozone). The selection of the wholesale interest rate is also an important part of this pass‐through transmission framework because it is related to the money supply process and therefore the central bank's policy capabilities. In the empirical part, a Johansen (1988) cointegration based error‐correction procedure (ECM‐GE) is implemented for the wholesale interest rate selection. Then an LSE–Hendry general‐to‐specific model (GETS) is applied, for the revelation of the banking sector pass‐through interest rate behaviour. In the empirical part, on the issue of the wholesale interest rate selection, the USA and the Eurozone seem to favour the Money Market rate while the UK and Canada favour the central bank policy rate. The results indicate two types of interest rate pass‐through behaviour, with market structure implication – namely, the US and UK banking systems contrasted with Canada–Eurozone.     

The European Single Currency and MENA's Exports to Europe

The paper investigates future exchange rate policy of the Middle East and North African (MENA) countries vis‐à‐vis the euro aimed at fostering their manufactured exports towards Euroland. The exchange rate policy is captured through three different indicators: the real effective exchange rate changes, volatility, and misalignment. The investigation is conducted for 11 sectors over the period 1970–1997. The sample includes four North African countries (Algeria, Morocco, Tunisia, Egypt) and Turkey. The results show that exchange rate management plays a crucial role in providing incentives for manufactured exports toward Euroland. The food sector is weakly responsive to real exchange rate changes while the textile sector is highly responsive. Four growing sectors (electronic, electrical, mechanical, and vehicles) were also found to be highly sensitive to exchange rate changes. The results suggest that policymakers should be more concerned with misalignment than with volatility.     

Interest Rate Pass-Through: Empirical Results for the Euro Area

Abstract. This paper empirically examines the interest rate pass‐through at the euro area level. The focus is on the pass‐through of official interest rates, approximated by the overnight interest rate, to longer‐term market interest rates, which, in turn, are a proxy for the marginal costs for banks to attract deposits or grant loans, and therefore passed through to retail bank interest rates. Empirical results, on the basis of a (vector) error‐correction and vector autoregressive model, suggest that the pass‐through of official interest to market interest rates is complete for money market interest rates up to three months, but not for market interest rates with longer maturities. Furthermore, the immediate pass‐through of changes in market interest rates to bank deposit and lending rates is found to be at most 50%, whereas the final pass‐through is typically found to be close to 100%, in particular for lending rates. Empirical results for a sub‐sample starting in January 1999 show qualitatively similar findings and are supportive of a quicker interest rate pass‐through since the introduction of the euro. It is shown that the difference between the adjustment speed of bank deposit and lending rates (typically around one versus three months since the common monetary policy) can to a large extent significantly be explained by credit risk considerations.