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.     

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.     

Real exchange rate dynamics in transition economies

The paper analyzes the phenomenon of real exchange rate appreciation that has characterized transition economies. It is shown that the real exchange rate—measured as the relative price of tradables in terms of non-tradables—is affected by adverse initial conditions and structural reforms only in the first 5 years of the transition process. After that period, the so-called Balassa–Samuelson effect seems to dominate the real exchange rate determination. The paper discusses the implications for exchange rate policy and concludes that while for countries of the former Soviet Union a flexible exchange rate regime seems desirable, for Central and Eastern Europe countries a stable exchange rate and even an early move to the adoption of the euro should be considered.     

Market power and exchange rate pass-through

In this paper we provide new empirical evidence on the relationship between market power, as measured by market share, and incomplete exchange rate pass-through. The role of market power is examined in the context of a Cournot model, which is estimated with data relating to Japan's presence in the US market. To test for the existence of possible aggregation biases due to sectoral heterogeneity, estimations are carried out on time series data for the total economy and the manufacturing sector and on panel data for five manufacturing industries at the three-digit level of classification, using the Johansen multivariate cointegration technique and the recently developed by [Larsson, R., Lyhagen, J., & Lothgren, M. (2001). Likelihood-based cointegration tests in heterogeneous panels. Econometrics Journal, 4, 109–142] multivariate panel cointegration technique. Hypotheses about the degree of pass-through are tested as restrictions on estimated equilibrium pricing equations and robustness tests are performed. The empirical results indicate that Japanese firms have market power and this validates the use of an imperfect competition model. However, it appears that market power is not the only element on which to base the analysis of the incomplete exchange rate pass-through by Japanese firms.     

Understanding changes in exchange rate pass-through

Recent research suggests that there has been a decline in the extent to which firms “pass-through” changes in exchange rates to prices. This paper provides further evidence in support of this claim. Additionally, it proposes an explanation for this phenomenon. The paper then presents empirical evidence of a structural break during the 1990s in the relationship between the real exchange rate and CPI inflation for a set of fourteen OECD countries. It is suggested that the recent reduction in the real exchange rate pass-through can in part be attributed to the low inflationary environment of the 1990s.     

A unified framework for analysing price interdependence,innovative activity and exchange rate pass-through

This paper develops an international oligopoly model in which domestic and foreign firms simultaneously choose their price and innovation strategies under the assumption of non-zero conjectural variations in relation to their competitors’ price changes. The model captures the links between the exchange rate, foreign and domestic firms’ prices and investment in process innovation and provides a unified framework for analysing exchange rate pass-through.     

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.     

Invoice currency choice,nonlinearities and exchange rate pass-through

ABSTRACT

Estimating time-varying thresholds as a proxy for exporter’s predicted exchange rates, this study proposes a new approach to analyse possible asymmetric behaviour of exchange rate pass-through (ERPT) or pricing-to-market (PTM) in Japanese exports between yen appreciation and depreciation periods. Constructing the industry-specific nominal effective exchange rate on a contract (invoice) currency basis, we perform the multivariate threshold near-vector autoregressive (near-MTVAR) estimation and reveal a strong tendency of symmetric ERPT in the short-run, between yen appreciation and depreciation periods. From the 2000s, however, Japanese machinery exporters increased the degree of PTM even in the long-run, while other industries raised the degree of long-run ERPT, reflecting the difference of product differentiation across industries. This evidence has significant implications for the recent unresponsiveness of the Japanese trade balance to the large depreciation of the yen.     

Financial constraints,firm entry,and exchange rate pass-through

Using a heterogeneous firm model with firm entry and endogenous markups, I study how the financial constraints of exporting firms affect exchange rate pass-through behaviors. I find that the financial constraints increase the degree of exchange rate pass-through.     

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.     

Devaluation and pass-through in indebted and risky economies

This paper develops a structural general equilibrium model to analyse the pass-through from devaluation to producer and consumer prices in Emerging Market Economies (EMEs). Simulation analysis shows that balance-sheet effects created by capital market imperfections and the home bias shrink the impact of devaluation on both types of internal prices. This finding helps explain why pass-through to internal prices is low in EMEs. It also shows that, for benchmark values of the parameters, devaluation remains a good device to modify the real exchange rate and to mitigate the negative impact of external shocks in EMEs.     

The effects of exchange rate pass-through and cost channel on price level: The case of fragile five countries

ABSTRACT

In this study, we investigated whether the exchange rate and the interest rate had an effect on the inflation rate in the fragile five countries between the years of 1996Q4 and 2015Q4. In this context, a model was created to estimate the effect of interest rate and exchange rate on the inflation rate. The methods used in the study take into account cross-section dependence and heterogeneity. As a result of the analysis, it was determined that there was an exchange-rate and interest-rate pass-through effect in the fragile five countries. Moreover, it was found out that the cost channel and price puzzle were effective in Indonesia and South Africa but were not effective in Turkey, Brasil and India.     

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.     

Exchange rate and inflation dynamics in dollarized economies

We use a panel of a hundred-plus countries with differing degrees of dollarization to perform an empirical analysis of the effects on inflation of exchange rate depreciations. The results qualify the common view that countries with higher dollarization exhibit higher inflation pass-through. We show that large depreciations tend to generate a negative impact on the pass-through coefficient, this impact being more intense the higher the level of dollarization of the economy. We interpret this as evidence that, in highly dollarized economies, the classic inflationary effects of a real depreciation—higher internal demand and imported inflation—can be offset or diminished by both the larger financial costs and the balance-sheet effect, especially if the depreciation is “large”. Additionally, the exchange rate regime is shown to matter: countries with fixed exchange rates suffer more noticeably the balance-sheet effects of large depreciations.     

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.     

A structural model of price and exchange rate dynamics in a small open economy

Conclusions A major result following from the analysis of ourstructural model of inflation under flexible exchange rates is that there is no such thing asstructural inflation in the long run. Long-run inflation rather becomes a purely monetary phenomenon if exchange rates are flexible and if on an international level functioning capital markets are postulated. While, in the light of the assumptions made in Part III, this finding is not nearly as paradoxical as it may appear at first sight, it can hardly be overemphasized considering the ongoing theoretical discussion and the empirical research on the Scandinavian approach to inflation and recalling that the Scandinavian model is basically intended to picture equilibrium dynamics.The results concerning equilibrium price and exchange rate dynamics also apply to the equilibriumlevels of prices and the exchange rate, i. e., the equilibrium price level depends exclusively on monetary factors while the equilibrium exchange rate is determined by a purchasing power parity element and the structural productivity gap component.Turning to the results of our analysis of disequilibrium dynamics, the overall picture does not change very much. Here the qualitative pattern of adjustment of both prices and the exchange rate is again completely independent of structural variables, but is exclusively determined by four adjustment coefficients. However, the particular quantitative values assumed by prices and the exchange rate during the adjustment process do indeed reflect the impact of the productivity gap.No conclusions can be derived from our model on the amount of time it takes to return to the neighbourhood of equilibrium once the economy has been subjected to some kind of external shock. A casual examination of post-1973 developments and especially the Swiss experience suggest, however, that in the case of a disturbance as, e. g., in the form of a monetary contraction (relative to the rest of the world), the economy may take so long to return to the neighbourhood of long-run equilibrium that the negative real consequences of the overvaluation of the domestic currency during the adjustment process provide a momentous rationale for short-run stabilization interventions in the foreign exchange market.We should like to thank Peter Bernholz and an anonymous referee for helpful comments on a previous version of this paper.     

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.     

Data frequency and exchange rate pass-through: Evidence from India's exports

This paper studies the pricing behavior of Indian exporters using both annual and monthly data in order to uncover the role of data frequency in determining variation in the degree of short and long-run exchange rate pass-through (ERPT). Export price data during the post-1991 economic reforms period is disaggregated at the two-digit industry level and using a novel methodology in the ERPT literature (cointegration for heterogeneous panels) cross-industry differences in adjustment are identified. We observe that there is clear evidence of incomplete ERPT to prices in India's export markets, after having controlled for the level of exchange rate volatility and domestic inflation as an indicator of variations in marginal cost. The empirical results indicate that monthly data reflect more incomplete ERPT to destination market prices, relative to annual data, in which all the short run rigidities are more likely to have been adjusted. Thus studies that use higher frequency data are more likely to find incomplete ERPT in the short-run, even in the context of an emerging market economy. In the long-run, incomplete ERPT subsists in a few industries for both data frequencies.