Exchange rate pass-through in New Member States and candidate countries of the EU

This paper studies the degree of exchange rate pass-through to the prices of imports of some New Member States (NMSs) of the European Union plus Turkey, coming from the euro area. I estimate industry-specific rates of pass-through across and within countries using the methodology proposed by Campa and González-Mínguez [Campa, J.M. and González-Mínguez, J.M. (2006). Differences in Exchange Rate Pass-Through in the Euro Area. European Economic Review, 50, 121–145.] which estimates the short- and long-run pass-through elasticities. I did not find evidence either in favour of the hypothesis of Local Currency Pricing (zero pass-through) or the hypothesis of Producer Currency Pricing (complete pass-through) for all the countries except for Slovenia and Cyprus. With reference to the results by industry, the lowest values for exchange rate pass-through are in Manufacturing sectors. However, I did observe a exchange rate pass-through decline through the pricing chain.     

Differences in long run exchange rate pass-through into import prices in developing countries: An empirical investigation

This paper investigates the exchange rate pass-through into import prices in a sample of 24 developing countries over the period from 1980 to 2003. We estimate a pass-through equation determined by a combination of the nominal exchange rate, the price of the competing products, the exporter's costs and demand conditions. We adopt non-stationary panel estimation techniques and tests for cointegration. In the long run, homogeneity of pass-through rates across countries can be rejected. Moreover, we show that most of these differences in exchange rate pass-through into import prices are due to three macroeconomics determinants: exchange rate regimes, trade barriers and inflation regimes.     

The exchange rate pass-through into import prices: the case of Japanese meat imports

Japan is a traditional net importer of food products in general and meat products in particular. Japanese meat imports come from a few countries thus making Japan potentially very sensitive to the swings in one or a few bilateral exchange rates. One of the key contributions of this article is the use of commodity (meats in this case) imports weighted exchange rates in the analysis. The standard practice in previous international agricultural trade studies related to either exchange rate pass-through or pricing to market was to use the aggregate trade weighted exchange rates usually provided by the Central Bank authorities or sources. Beef and poultry import prices indicate partial exchange rate pass-through while import prices of pork indicate zero exchange rate pass-through, primarily due to gate price policy system applied to pork imports. In terms of competitiveness, these results suggest relatively more competitive markets among poultry importing firms, somewhat competitive markets among beef importing firms, while competitiveness of pork importing firms could not be assessed due to existing import policies.     

Re-examining the exchange rate pass-through into import prices using non-linear estimation techniques: Threshold cointegration

We document a significant threshold cointegrating relationship among effective nominal exchange rates and import prices. Using quarterly data for five industries of 16 OECD countries, we find that the degree of pass-through improves dramatically from the 50% average documented in the literature once threshold effects are recognized. The results of our threshold cointegration model show that import prices respond faster and by a larger extent to nominal exchange rate shocks than is the case for more conventional models. These findings give empirical support to the hypothesis that an equilibrium rate of pass-through exists (e.g. [Bacchetta, P., & Van Wincoop, E. (2005). A Theory of the currency denomination of international trade, Journal of International Economics 67, 295–319; Devereux, M., Engel, C., & Storgaard, P. (2004). Endogenous exchange rate pass-through when nominal prices are set in advance, Journal of International Economics 63(2), 263–291]).     

EMU and the transmission of monetary policy: evidence from business lending rates

This paper analyses the pass-through of money market rates to short-term and long-term business lending rates in the four largest euro area countries. The main findings of the paper are (1) that since the start of EMU loan rates appear to have become more responsive to money market rate changes in France, Italy and Spain, but not in Germany, and (2) that German loan rates are significantly more sluggish than loan rates in the other three large euro area countries. I also test for non-linear pass-through based on an asymmetric error-correction model but do not find much evidence of non-linearity in euro area interest rate pass-through.The views expressed in this paper do not necessarily represent the views of the Deutsche Bundesbank.     

Tobin's Q channel and monetary policy rules under incomplete exchange rate pass-through

This paper focuses on the role of the Tobin's Q channel in a two-country framework in which exporting firms set their prices on the basis of local currency pricing. Incomplete exchange rate pass-through significantly affects the Tobin's Q channel in each country compared with the case of complete exchange rate pass-through. We explore whether different specifications of monetary policy enhance social welfare. Regardless of the degree of home bias, a monetary policy rule that stabilizes domestic asset prices attains preferable outcomes to several alternative policy rules considered in our analysis. Notably, there are large gains from employing a domestic asset price rule when the home bias is large. A monetary policy rule that stabilizes the asset prices of both countries results in worse outcomes. Our simulation results suggest that stabilizing asset prices is important in an open economy with incomplete exchange rate pass-through.     

Exchange rate pass-through: The case of China

This paper studies the degree of the exchange rate pass-through (ERPT) to import and consumer prices in China with both the ratio of China’s imports to GDP and domestic prices of China’s main trade partners going up. Statistic results show that the degree of ERPT is somehow less than the degree of marginal cost plus mark-up pass-through of exporters, and econometric analyses reach the same conclusion. Besides, the ERPT to import prices is found to be high while the ERPT to CPI is low owing to some factors that obstruct the import prices pass-through channel to domestic CPI. But this situation has been changing significantly since August 2005. Thus, a more flexible exchange rate system is needed for China to absorb the price shock from aboard efficiently.     

Trade liberalisation and exchange rate pass-through: the case of textiles and wearing apparels

Studies on the relationship between exchange rates and traded goods prices typically find evidence of incomplete pass-through, usually explained by pricing-to-market behaviour. Although economic theory predicts that incomplete pass-through may also be linked to the presence of non-tariff barriers to trade, variables reflecting such a link is rarely included in empirical models. In this paper, we estimate a pricing-to-market model for Norwegian import prices on textiles and wearing apparels, controlling for non-tariff barriers to trade and shift in imports from high- to low-cost countries. We apply the cointegrated VAR approach and develop measures of foreign prices based on superlative price indices (including the Törnqvist and Fischer price indices) and a data calibration method necessary to approximate relative price levels across countries. Our measures of foreign prices thereby account for inflationary differences and varying import shares and price level differences (known as the China effect) among trading partners. We show that these measures of foreign prices, unlike standard measures used in the pricing-to-market literature, are likely to produce unbiased estimates of pass-through. Once the China effect is controlled for, we find little evidence that pass-through has changed alongside trade liberalisation.     

Impact of exchange-rate variability on commodity trade between U.S. and Germany

Previous studies that looked at the impact of exchange rate volatility on trade flows used aggregate trade data between one country and rest of the world or between two countries. More recent studies, however, have expanded the literature by using a highly disaggregated commodity level data between two countries. In this paper we consider the sensitivity of 131 industries that trade between U.S. and Germany. We find that exports and imports of a majority of the industries react to the real dollar–euro volatility in the short run. The short-run effects, however, last into the long run only in almost 50 % of the industries. Among these industries, while almost all U.S. exporting industries are affected favorably by exchange rate volatility, a majority of the U.S. importing industries are affected adversely.     

Exchange rate uncertainty and import prices in the euro area

This paper analyzes the effects of exchange rate uncertainty on the pricing behavior of import firms in the euro area. Uncertainty is measured via the volatility of the structural shocks to the exchange rate in a nonlinear vector‐autoregressive model framework and is an important determinant of import prices. An increase in exchange rate uncertainty is associated with a fall in prices on average, which suggests that the exchange rate risk is borne by the importers. Controlling for the origin of imports (within or outside the euro area) is important for assessing the impact of exchange rate movements on prices.     

The transmission of euro area monetary policy to financially euroized countries

This paper provides a comprehensive analysis of the interest rate pass-through of euro area monetary policy to retail rates outside the euro area, contributing to the literature on the consequences of unofficial financial euroization and on the transmission channels of monetary policy spillovers. The results suggest that in the long run, more than the one-third of all euro retail rates in euroized countries of central, eastern, and south-eastern Europe is linked to the euro area shadow rate. Compared with euro area monetary policy, the share of cointegration of the domestic monetary policy rate is on average lower, suggesting that domestic central banks in euroized countries with independent monetary policy can only partially control the “euro part” of the interest rate channel. Furthermore, euro area monetary policy shocks are fast and persistently transmitted into euro retail rates outside the euro area, which constitutes an additional channel of international shock transmission.     

European monetary union, adjustment, and exchange rate variability

This paper uses a three-country, three-good, factor-specific model of trade with wage rigidities to investigate how European Monetary Union is likely to affect exchange rate variability. Focusing on international macroeconomic adjustment under both exogenous and optimizing monetary policies, it shows that the relative variability (against external currencies) of the euro and a basket of predecessor currencies depends on the relative sizes and specialization patterns of countries and the relative importance of different shocks. Monetary union is likely to decrease (increase) aggregate European exchange rate variability for shocks to industries in which large (small) euro area countries specialize.     

Exchange rate pass-through in Canadian manufacturing: its direct and indirect components

Changes in the exchange rate have direct and indirect effects on the prices of domestically produced goods and imports in the domestic market. The direct effects originate with the impact of the exchange rate on the marginal cost of imports; the indirect effects, with its impact on the price of materials used by domestic producers and hence on their marginal costs. Direct and indirect exchange rate pass-through elasticities are estimated for 37 Canadian manufacturing industries and their determinants are examined in a cross-section analysis. It is found that the direct and indirect elasticities are approximately equal in size for domestic goods, while the direct effect is dominant for imports. For a small number of industries, the net result of the direct and indirect effects is that a depreciation of the domestic currency increases the competitiveness of imports, contrary to conventional analysis. Important determinants of the direct (indirect) elasticities are the import share and non-tariff barriers (the responsiveness of domestic costs to changes in the exchange rate, and concentration).     

Passthrough of Exchange Rate and Tariffs into Import Prices of India: Currency Depreciation versus Import Liberalization*

This paper examines the extent of passthrough of exchange rate and tariff changes into import prices using sectoral panel data (at the two‐digit SITC level) for the post‐reform period in India (1990–2001). After having controlled for unobserved effects that might have an impact on the import prices by using sector dummies, we find that on average exchange rate passthrough (ERPT) is a dominant effect compared to tariff rate passthrough (TRPT) in explaining changes in India's import prices. The sectoral panel results suggest that the passthrough of exchange rates and tariff rates varies across products. ERPT into import prices is significant in 12 industries, whereas TRPT is significant only in six industries, with full passthrough. However, ERPT is incomplete only in four industries, but TRPT is incomplete in 36 industries, which means that firms exporting to India more frequently adopt strategies to maintain their market share against tariffs than against exchange rate changes. The sectoral differences in passthrough seem to be related to the sector's share in total imports and the sector's effective protection rate. Hence, India's relatively high levels of protection have an impact on the behavior of foreign exporters.     

Financial market fragmentation and monetary transmission in the euro area: what do we know?

We provide a survey on the literature examining financial market fragmentation in the euro area and discuss the policy options how to reduce it. The fragmentation has increased markedly since the outbreak of the global financial crisis in 2007. It declined somewhat from late 2012 onwards, but is still above the pre-crisis level. Interest rate pass-through has become less efficient primarily because of increased mark-ups and, to a certain extent, the lower responsiveness of bank interest rates to policy rates. The effectiveness of interest rate pass-through has become more heterogeneous across euro area countries, making a common monetary policy more difficult. The unconventional monetary policy conducted by the European Central Bank has reduced financial market fragmentation notably; however, this policy was not without side effects. Enhancing financial and fiscal stability in the euro area is key for the efficient functioning of the monetary transmission mechanism.     

Passthrough Estimates and the Choice of an Exchange Rate Index*

We examine exchange rate passthrough into US import prices for 29 manufacturing industries using eight exchange rate indexes. These indexes vary by the number of currencies included; whether the weight on each currency is based on total trade with the United States or solely imports; and, whether the weights vary by industry. Our results indicate that passthrough is generally incomplete but varies across industries. Moreover, passthrough is sensitive to the exchange rate index. Using bootstrapped J‐tests we show that major currency indexes perform better than their broad currency counterparts. When using a major currency index, industry‐specific exchange rate indexes are preferred to aggregate indexes.     

Structural breaks in the lending interest rate pass-through and the euro

This paper investigates whether size and speed of the pass-through of market rates into short term business lending rates have increased in the wake of the introduction of the euro. Allowing for multiple unknown structural breaks we find two in four EMU countries, and in the UK as well, and a single one in five other countries. The pattern of dates fits national banking systems adjusting slowly to the new monetary regime and suggests caution in associating structural changes to the introduction of the euro. The estimated equilibrium pass-through in the last break-free period is on average more incomplete, hinting at a reduced effectiveness of the single monetary policy. These results run against the economic intuition that a reduced volatility in money market rates is bound to mitigate uncertainty and to ease therefore the transfer of policy rate changes to retail rates; the run-up to Basel 2 and a deterioration of competition in loan markets could be the motivations. Caution in extrapolating these findings to recent periods is suggested by the differences between the unharmonized and the new harmonized retail rates.     

Exchange rate pass-through,price discrimination,and US meat export prices

Exports are becoming increasingly important for US livestock and poultry producers. Consequently, meat industry participants are concerned about the potential impacts of variations in relative currency values. These effects are considered by quantifying the impacts of relative exchange rates on US beef, pork and poultry export prices. In addition, the impacts of GATT and NAFTA agreements on exchange rate pass-through are considered. The results indicate incomplete exchange rate pass-through occurs for several countries. Trade liberalization under GATT has positively influenced US beef and poultry export prices.     

Constraints on exchange rate flexibility in transition economies: a meta-regression analysis of exchange rate pass-through

This article uses Meta-Regression Analysis (MRA) to investigate exchange rate pass-through to domestic prices, highlighting differences between transition and developed economies. A total of 23 studies yielded 575 coefficients measuring exchange rate pass-through to import prices and consumer prices for 23 developed and 12 transition economies. The MRA results confirm the finding of many particular analyses that exchange rate pass-through is less than complete. In addition, exchange rate pass-through is higher to import prices than to consumer prices; and exchange rate pass-through is higher in the long run than in the short run. Regarding transition and developed economies, MRA suggests that there is no statistically significant difference in exchange rate pass-through to import prices. Yet, exchange rate pass-through to consumer prices is significantly and substantially higher in transition than in developed economies. This finding is consistent with the caution of many monetary authorities in transition economies regarding exchange rate flexibility.     

Pass-through in dollarized countries: should Ecuador abandon the US dollar?

In this article, we examine the convenience of dollarization for Ecuador today. As Ecuador is strongly integrated financially and commercially with the United States, the exchange rate pass-through should be zero. However, we sustain that rising rates of imports from trade partners other than the United States and subsequent real effective exchange rate depreciations are causing the pass-through to move away from zero. Here, in the framework of the Vector Error Correction Model, we analyse the impulse response function and variance decomposition of the inflation variable. We show that the developing economy of Ecuador is importing inflation from its main trading partners, most of them emerging countries with appreciated currencies. We argue that if Ecuador recovered both its monetary and exchange rate instruments, it would be able to fight against inflation. We believe such an analysis could be extended to other countries with pegged exchange rate regimes.