Exchange rate pass-through and product heterogeneity: Does quality matter on the import side?

This paper investigates theoretically and empirically the heterogeneous response of exporters to real exchange rate fluctuations due to the quality of imported inputs and exported output. We develop a model where the production of high-quality products requires high-quality inputs sold in monopolistically competitive foreign markets. The model predicts that exporters using imported inputs have low exchange rate pass-through, but this effect is weaker for firms shipping high-quality goods. This is due to the heterogeneous price adjustments of foreign suppliers selling inputs of different quality. We test the predictions of the model using Italian firm-level trade data for the period 2000–2006. The empirical analysis shows that the imports of intermediates have a significantly weaker effect in reducing the exchange rate pass-through into the export price of high-quality varieties. By showing that the import price of high-quality inputs is less sensitive to exchange rate variations, we provide evidence supporting the theoretical hypothesis that the pricing power of input suppliers weakens the import channel.     

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.     

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.     

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.     

Differences in exchange rate pass-through in the euro area

This paper focuses on the pass-through of exchange rate changes into the prices of imports made by euro area countries originating outside the area. Using data on import unit values for 13 different product categories for each country, we estimate industry-specific rates of pass-through across and within countries for all euro members. In the short-run, pass-through rates differ across industries and countries and are less than one. In the long-run neither full pass-through nor equality of pass-through rates across industries and countries can be rejected. Differences exist across euro area countries in the degree that a common exchange rate movement gets transmitted into consumer prices and costs of production indices. Most of these differences in transmission rates are due to the distinct degree of openness of each country to non-euro area imports rather than to the heterogeneity in the structure of imports.     

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.     

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.     

Nonlinear exchange rate pass-through in industrial economies

This article presents theoretical arguments for a nonlinear pass-through relationship for import and export prices and investigates the relationship empirically. The theoretical argument is based on the menu-cost approach in which small absolute changes in exchange rates may not prompt price changes because the costs of doing so exceed the extra profits generated for firms involved in international trade. This relationship is investigated empirically using quarterly data for the period 1979q1-2015q1 for a sample of 17 countries. In the case of import prices, evidence is found of nonlinear adjustment consistent with the theoretical model in 4 out of 17 cases. In the case of export prices, such a relationship is only evident for two economies in the sample. However, for both the import and export price cases, a significant positive nonlinear relationship is found for the two largest economies in the sample, i.e. the United States and Japan.     

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.     

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.     

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).     

Does the exchange rate pass-through into prices change when inflation targeting is adopted? The Peruvian case study between 1994 and 2007

This paper analyzes whether the exchange rate pass-through into prices changed when the inflation targeting scheme was adopted in Peru. First, a simple dynamic stochastic general equilibrium model is simulated, which shows that adopting this scheme induces an increase in exchange rate volatility. Furthermore, applying the theory of the currency denomination of international trade, it is demonstrated that increased exchange rate volatility reduces the share of firms that set their prices in foreign currency. Given that the pass-though has a direct relationship with this share, it is shown that adopting inflation targeting generates a pass-through contraction. Second, we empirically test whether the Peruvian Central Bank’s decision to adopt inflation targeting in January 2002 actually had an effect on the pass-through estimating a time-varying vector autoregressive model which allows for an asymmetrical estimation of the pass-through. It provides parameters for both the pre and post inflation targeting regimes based on the assumption that the transition from one regime to the other is smooth. An analysis of the generalized impulse response functions reveals that the decision to adopt inflation targeting significantly decreased the exchange rate pass-throughs into import, producer, and consumer prices. The results are consistent with economic theory and are robust to the specification of parameters of the model.     

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]).     

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.     

Exchange rates and commodity prices: the case of Australian metal exports

Exporters of homogeneous commodities are usually regarded as ‘price takers’ who operate in perfectly competitive international markets, so that the pass-through of exchange rate changes to foreign-currency prices must be zero. However, many Australian commodities are subject to influences that may produce more complex pricing strategies, for example, markets in which Australia is a dominant exporter, or where there are few buyers and sellers due to the presence of large multi-national corporations. This study uses multivariate cointegration techniques to examine the pricing of Australian metal exports, with particular emphasis on the degree and timing of the pass-through of exchange rate and other changes.     

Exchange rate pass through,macro fundamentals and regime choice in Latin America

The impact of changes in exchange rate on inflation is an issue of extreme importance for nations with a history of high inflation. While there have been significant studies on industrial and advanced economies, little analysis has been conducted on smaller economies that are open to trade and financial relationships. This paper estimates exchange rate pass-through (ERPT) into CPI and import prices from 1970 to 2010 for nine Latin American nations. ERPT is further estimated for each decade documenting declining pass-through after the turn of the millennium. The paper also examines the impact of macro fundamentals on ERPT, and finds monetary policy stability, inflation rate and trade openness to have a positive impact on pass-through. Finally, de facto exchange rate flexibility indices are constructed and ERPT rates are found to negatively affect them.     

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.     

Exchange rate pass-through, menu costs and threshold cointegration

This paper investigates exchange rate pass-through (ERPT) in the presence of menu costs. Assuming exports prices are negotiated in the exporter’s currency, menu costs give rise to two thresholds around (within) which incomplete ERPT is (not) observed. An error correcting process is triggered from a deviation in the ERPT cointegrating relation only when the deviation is large enough in absolute value to fall outside of a band defined by symmetric thresholds. Threshold autoregressive (TAR) cointegration techniques are used to investigate Quebec and Ontario pork meat export prices in the US and Japanese markets. Through Monte Carlo simulations, we find that our Equilibrium-TAR tests have greater power than a standard unit root test. Our empirical application suggests that Canadian pork exporters exercise market power in the US market. The evidence of incomplete ERPT in the Japanese market is weaker and differs across provinces. Evidence of thresholds is reported for both destinations, thus indicating the existence of significant menu costs for Canadian pork exporters in these markets.     

EXCHANGE RATE PROBLEMS IN NATIONAL ACCOUNTING OF DEVELOPING COUNTRIES*

Developing countries which typically have import surpluses and inflationary pressures because of insufficient savings are prone to use indirect taxes on imports (Tm) and subsidization of exports (Sx) in order to prevent deterioration of the balance of trade. If these substitutes for devaluation are included in the net indirect tax component of product at current market prices (Ym) the import surplus is likely to be understated, and Ym upward biased. This distortion will be avoided if imports and exports are measured at effective exchange rates (ER), that is, at official rates (OR) plus Tm and Sx respectively, and if (Tm - Sx) is deducted from the net indirect tax component of Ym. Only in this manner become imports and exports consistent with the other uses and resources at market prices and can be articulated with them. At base-year prices the volume index of product at OR diverges from that of ER to the degree that the composition of imports and exports in regard to tax and subsidy rates computed ad valorem significantly changes. Such a case is similar to that of the price indexes of imports and exports moving in diverging proportions: the trade balance at base-year prices will differ from that at current prices. The resulting discrepancies in national accounts have led to proposals of deflating, for example, exports by the price index of imports. Suchlike approaches are incompatible with the principle of national accounting that prices are supposed already to measure substitution values. Deflating exports by import prices means reintroducing substitution values, as does, for example, deflation of incomes by a consumer price index. Correspondingly, since the trade balance at ER conceptually expresses the value of imports at domestic market prices as compared to the corresponding domestic market value of exports, and if at ER the trade balance diverges from that at OR, the former balance has an important meaning (as has the trade balance at base-year prices as compared to that at current prices) and the resulting discrepancy between the two measures should not be removed merely for the sake of accounting smoothness. In contrast to the market price approach, the measurement of product at base-year factor cost is indifferent to the measurement of the trade balance at ER and at OR. It is, therefore, proposed in countries in which part of import taxation and export subsidization substitutes for devaluation, to record imports and exports in the national accounts at effective exchange rates, and to correct the net indirect tax component of product correspondingly. Imports and exports at official exchange rates should be shown within the balance of payments, and the latter separately as a memorandum item.     

Firm productivity and importing: Evidence from Chinese manufacturing firms

This paper investigates various aspects of the relationship between firm productivity and importing for a large sample of Chinese firms between 2002 and 2006 making a distinction between the origin, variety, skill and technology content of imports. Employing a random effects probit model and a propensity score matching with difference‐in‐differences (PSM–DID) approach and treating imports as endogenous in our measure of total factor productivity (TFP) (De Loecker 2007), we test the self‐selection and learning‐by‐doing hypotheses. Our results show evidence of a bi‐directional causal relationship between importing and productivity. Although importing firms tend to be more productive before entering the import market, once they start importing firms experience significant productivity gains for up to two years following entry. We also find evidence of learning effects following the decision to import, which is stronger when import starters source their products from high‐income economies, import a wider variety of products and import products with a higher skill and technology content. A number of robustness checks confirm the learning effects of importing on TFP growth.