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]).     

Exchange rate pass-through in Turkish export and import prices

This article investigates the effects of horizontal acquisitions on the performance of target firms in the 1990s. Using French manufacturing firm-level data, we examine two main indicators of performance: the profit and the productive efficiency. We distinguish domestic from cross-border acquisitions. To evaluate the impact of take-overs, we implement appropriate difference-in-difference estimation techniques associated to a matching propensity score procedure. We find that Mergers &?Acquisitions (M&A) do not increase the profit of French target firms, even on the long run. However, they clearly raise the productivity of target firms. These results suggest that firms probably redistribute efficiency gains at the upstream and/or downstream production stage. There is no evidence of an increase in market power. In addition, the consequences of domestic and cross-border M&A significantly differ. Efficiency gains are stronger for cross-border M&A. This conclusion is however true only for extra-European Union operations. The achievement in the European economic integration certainly explains the absence of difference between European and domestic acquisitions. Finally, our results cast some doubt on the frequent discrimination attitude towards foreign takeovers and the fears of their impact on firms’ performance and the host country's welfare.     

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.     

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.     

The effect of firm-level productivity on exchange rate pass-through

A heterogeneous-firm trade model can explain the recent decrease in exchange rate pass-through to aggregate US import prices as a result of decreased trade costs. This paper finds support for this explanation by testing another implication of this type of heterogeneous firm model: lower exchange rate pass-through for goods that are traded for short periods of time.     

Exchange rate pass-through in deflation: The case of Taiwan

This paper incorporates deflation in an analysis of the relationship between the exchange rate pass-through and inflation. Using a nonlinear model based on monthly data of Taiwan's import prices from 1981 to 2008, we find that the degree of exchange rate pass-through is increasing in deflation. The increase becomes smaller when the price of oil is excluded. Evidence for pass-through increasing in deflation has not previously been found in the existing literature and presents a new understanding of the pricing behavior of firms. Poor profits in deflation cause firms to pass through most of the cost of exchange rate changes to their products to avoid exiting the market.     

State space models for the exchange rate pass-through: determinants and null/full pass-through hypotheses

In this article, we formulate linear Gaussian state space models for the estimation of the exchange rate pass-through of the Brazilian Real against the US Dollar, using monthly data from August 1999 to August 2008. The state space/Kalman filtering framework allows the investigation of some empirical aspects previously suggested in the literature, such as time-varying coefficients and null/full pass-through hypotheses. We also test whether some theoretical ‘determinants’ of the pass-through are statistically significant in the period considered. The principal findings are as follows: (1) the data offer strong support to a time-varying pass-through; and (2) the variance of the exchange rate pass-through, the monetary policy and the trade flow have shown to be relevant determinants of the exchange rate pass-through.     

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.     

Some implications for monetary policy of uncertain exchange rate pass-through

The paper uses MULTIMOD to examine the implications of uncertain exchange rate pass‐through for the conduct of monetary policy. From the policymaker's perspective, uncertainty about exchange rate pass‐through implies uncertainty about policy multipliers and the impact of state variables on stabilization objectives. When faced with uncertainty about the strength of exchange rate pass‐through, policymakers will make less costly errors by overestimating the strength of pass‐through rather than underestimating it. The analysis suggests that pass‐through uncertainty of the magnitude considered does not result in efficient policy response coefficients that are smaller than those under certainty.     

Monetary policy credibility and exchange rate pass-through: Some evidence from emerging countries

Considering external constraints on monetary policy in emerging countries, we propose a semi-structural vector autoregressive model with exogenous variables (VARX) to examine the exchange rate pass-through to domestic prices. We demonstrate that a lower exchange rate pass-through is associated with a credible monetary policy aiming at controlling inflation. The empirical results suggest that the exchange rate pass-through is higher in Latin American countries than in East Asian countries. The exchange rate pass-through has declined after the adoption of an inflation targeting monetary policy.     

Explaining forecasting bias: The case of real exchange rate variance

Recent tests of the rational expections hypothesis (REH), based on the assumption that agents are risk-neutral, have yielded conflicting results when applied to foreign exchange markets. Here a two-stage procedure which does not assumej risk-neutrality is derived from a model of a utility-maximizing importer who incurs an adjustment cost if he changes his import order. Although a short-run test (based on aggregate imports) leads to rejection of the REH in the majortity of cases, a longer-ren test (based on manchinery imports) is more favourable to the null huypthesis. The observed shot-run tendency to, in effect, ignore low levels of real exchange rate variation is found to be more likely when bilateral rates have remained relatively stable, when the importingj economy is relatively closed, or when governments have announced policies of intervention to stabilize bilateral rates.     

Oil prices and the real exchange rate in Iran: an ARDL bounds testing approach

This article examines the impact of oil prices on the real exchange rate in Iran during the 1961–2014 period using the autoregressive distributed lag approach to cointegration as the estimation method. We find that higher oil prices lead to appreciation of the real exchange rate. The results reveal that oil prices have both short-run and long-run effects on the real exchange rate.     

Estimating the equilibrium real exchange rate: the case of Turkey

This article is the first attempt in the literature to investigate the effects of public social security on aggregate consumption in a time-series setting for a developing country, Turkey that has one of the most generous social security systems in the organization for economic cooperation and development (OECD) region. In order to quantify the social security variable, this article uses the social security wealth (SSW) series calculated for Turkey in a separate study. This study indicates that SSW is the largest part of the household wealth in Turkey, and therefore should not be ignored in the aggregate consumption studies. The results show that its effect on consumption is positive and robust.     

A simultaneous analysis of exchange-rate passthrough into prices of imperfectly substitutable domestic and import goods

For the most part, the relationship between import and domestic prices, and their common linkages to currency movements, has been ignored, especially at the industry level. This paper examines the direct and indirect impacts of exchange rates on prices, analyzing a panel of 26 4-digit SIC industries over the 1978–1987 period. The results are consistent with the view that the indirect influence of exchange rates on domestic prices through import competition clearly dominates any direct impact, and that import prices are motivated largely by pricing-to-market. We find some evidence of a limiting effect of market concentration on passthrough into both domestic and import prices, while an increased reliance on imported inputs and increased substitutability between domestic and foreign goods each enhances the passthrough into domestic prices.     

The response of the US export prices to changes in the dollar's effective exchange rate: further evidence from industry level data

The relationship between the dollar's effective exchange rate and the export price indexes for 13 two-digit US manufacturing industries is analysed to determine (i) which industry adjusts its dollar export price to dampen or amplify the effect of the exchange rate fluctuations on the foreign-currency price of its exports and (ii) whether the response of the export price index to appreciation and depreciation of the exchange rate is asymmetric. For several industries, evidence consistent with dampening the foreign-currency price of exports in an asymmetric fashion is found. The implications of the results for the price competitiveness of the industries studied is discussed.     

The real exchange rate and the black market exchange rate in developing countries

This article tests for the validity of the Purchasing power parity (PPP) theory using both the black market and the official exchange rates for panels with cross sectional dependency. The test is conducted using a newly developed, nonlinear IV panel unit root test that properly handles cross-sectional dependency for thirty-seven developing countries. We find that the null of joint unit root hypothesis is rejected for the whole panel, using the black market exchange rate, and for sub-panels of African and high inflation countries, using either exchange rate. The black market-based real exchange rates are, therefore, shown to provide stronger evidence for the purchasing power parity theory than do the official rates. This finding is consistent with the observation that black market exchange rates better represent market forces and thus are more relevant when testing for the validity of the PPP theory in developing countries.     

A structural model of cost pass-through: the case of the US yogurt retailing

We provide a structural framework for retail cost pass-through based on a neoclassical inverse demand model and retail profit maximization conditions. Unlike previous literature where game-theoretic structures are imposed on cost pass-through, our framework allows for estimating cost pass-through and the degree of market competition simultaneously. Further, our model incorporates potential cross-brand effects representing demand substitution and strategic complementarity effects. Our model supplements the traditional reduced-form approach to pass-through and is applicable in environments, where the lack of brand-level cost data renders reduced-form analysis infeasible. The empirical value of our model is illustrated in an econometric analysis of retail pass-through for national and store brand yogurt. Our results indicate that: (1) market competition has a positive impact on own-brand cost pass-through, especially for national brands, and (2) overlooking cross-brand effects results in biased own-brand pass-through estimates. Finally, we provide a graphical illustration of the relationship between cost pass-through and market competition.     

Behavioural equilibrium exchange rate and total misalignment: evidence from the euro exchange rate

In the present paper we attempt to investigate whether the nominal exchange rate of the euro against the currencies of the four major trading partners of the eurozone, namely China, Japan, the UK and the USA, converges or not to its equilibrium level. Applying recent unit root and system cointegration techniques in the presence of structural shifts in the data, our results indicate that there exist an equilibrium relationship between each of the euro/yuan, euro/yen, euro/UK pound and euro/US dollar nominal exchange rates and the fundamentals defined by the monetary model. Following these results, our modified Behavioural Equilibrium Exchange Rate model suggests that at the end of the estimated period, the euro/Chinese yuan and the euro/UK pound nominal exchange rates follow an equilibrium process. Our empirical results also imply that the single European currency is considered as overvalued against the US dollar, while it is considered as undervalued against the Japanese currency.     

The long-run convergence of exchange rates and prices in the European Union

This paper provides tests of Purchasing Power Parity (PPP) for members of the EU-27 not in the euro area, using multivariate and panel cointegration techniques, for the period since the introduction of the euro currency in 1999 until the end of 2009. The results indicate that long-run PPP holds in ten cases and that domestic prices or the nominal exchange rate is the main driver of the short-run adjustment to stationarity. These results are discussed in terms of monetary convergence in the long-run.     

The effect of exchange rates on prices,wages, and profits: A case study of the United Kingdom in the 1990s

Abstract

During the 1990s the United Kingdom experienced large and sudden exchange rate movements that had no apparent impact on overall consumer prices. This paper shows that the stability of UK consumer prices was made possible in part by offsetting movements in the price-cost margins of foreign exporters and in part by offsetting price-cost margins in the UK distribution sector. At the same time, UK manufacturers experienced margin swings in the opposite direction, largely due to their role as exporters. Thus, sterling depreciation boosted the profits of UK manufacturers and squeezed the profits of UK distributors, while sterling appreciation had the opposite effects.