Incomplete Exchange Rate Pass-Through: Evidence from Exchange Rate Reform in China |
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Authors: | Yunong Li |
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Affiliation: | School of International Business, Southwestern University of Finance and Economics, Chengdu, Sichuan, China |
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Abstract: | Exchange rate disconnect is one of the central puzzles in international macroeconomics. Recently, there is a growing literature that studies the microeconomic foundations or mechanisms for incomplete exchange rate pass-through. However, the estimations of the exchange rate pass-through vary widely in the existing literature. Our article proposes the use of a policy-based instrumental variable for exchange rate, exploiting the exchange rate reform in China, and finds that 67% of exchange rate pass-through into the FOB export price of Chinese exports. This contrasts to the almost full exchange rate pass-through using OLS estimation. We further find that the export price of homogeneous goods, low-technology goods, and goods supplied by domestic non-SOEs is more sensitive to exchange rate changes. |
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Keywords: | exchange rate pass-through exchange rate reform heterogeneous effects policy-based instrumental variable |
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