Explaining the exchange rate pass-through in different prices

Choudhri, Ehsan U.; Faruqee, Hamid; Hakura, Dalia

doi:10.1016/j.jinteco.2004.02.004

Cited by 115 publications

(87 citation statements)

References 42 publications

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“…Choudhri and Hakura (2006) shows that estimated exchange rate pass-through tends to vary systematically with the mean inflation rate. Choudhri, Faruqee, and Hakura (2005) is more similar to our paper in providing evidence that low pass-through is attributable to sticky prices and local currency pricing. Their model differs from ours in a number or respects, however, and does not endogenize the frequency of price adjustment.…”

Section: Section 1 Introductionsupporting

confidence: 83%

Price Adjustment and Exchange Rate Pass-through

Devereux

Yetman

2005

SSRN Journal

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This paper develops a simple theoretical model that can be used to account for the determinants of exchange rate pass-through to consumer prices. While recent evidence has found low estimates of pass-through in many countries, there is little consensus on an explanation for this. Our paper argues that sticky prices represent a key determinant of exchange rate pass-through. We make this argument in two stages. First, holding the frequency of price change constant, we show that our model calibrated to data from low inflation countries can reproduce the estimates of very low pass-through for these countries. The principal determinant of low pass-through in this case is the slow adjustment of prices. We then extend the model to allow the frequency of price change to be endogenous. Calibrating to a wider set of countries, including both low-inflation and high-inflation countries, we show that our model implies that exchange rate passthrough is increasing in average inflation, but at a declining rate.

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Section: Section 1 Introductionsupporting

confidence: 83%

Price Adjustment and Exchange Rate Pass-through

Devereux

Yetman

2005

SSRN Journal

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“…Choudhri, Faruqee and Hakura (2005) examine the . relative performance of different macroeconomic models in explaining exchange rate pass-through and find that the introduction of distribution costs improves the fit of the models substantially from the evidence for I In that paper, international trade costs are export entry sunk costs and iceberg type marginal costs 2 In a model of producer currency pricing (the opposite ofPTM or local currency pricing), Corsetti and Dedola (2002) show that local distribution costs influence the price elasticity of demand which is then sensitive to the exchange rate.…”

Section: Theoretical Background: Determinants Of Ptmmentioning

confidence: 99%

Exchange Rates and Exports: Evidence from Manufacturing Firms in the UK

Zhang

2007

SSRN Journal

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The thesis exammes the effect of exchange rate variability on firms' export decisions, using data for UK manufacturing firms. We separately investigate the relationship between the changes of level of exchange rate and exports and that between exchange rate uncertainty and exports. Our results show that export extensive margin is not significantly related to changes in the level of exchange rates, whereas exchange rates have a significant and negative impact on the export intensity. Since industry heterogeneity is important in the effect of exchange rate level changes, we further explore possible explanations. In particular, we test whether external orientation and market structure play a role in the effect. Our results provide significant evidence for the role of external orientation and market structure. We also find significant evidence for the hysteresis effect of exchange rate uncertainty on exports, using new measures of uncertainty. In both cases, the behaviour of multinationals is investigated. We find that multinationals are less likely to be negatively affected by both changes of level of exchange rate and exchange rate uncertainty than indigenous firms.It contributes to the micro econometric literature in several aspects. Our evidence for industry heterogeneity from UK firm level data is new. Our explanations for industry heterogeneity by testing two hypotheses are the first attempt to investigate the factors driving different effects across industries. New measures of exchange rate uncertainty and related new method are used to test the hypothesis of hysteresis effects of uncertainty on trade. The use of micro data and new measures enable us to overcome the econometric difficulties and problems in previous studies. We also investigate whether multinationals' export behaviour is different from that of indigenous firms in response to exchange rate fluctuations. As far as we know, the multinationals' ability to deal with currency risk has never been examined before. The thesis provides new evidence for the multinationals' advantage of internalising currency risk over indigenous firms under exchange rate movements. II AcknowledgementsI would like to express my gratitude to all those who helped me in completing this thesis. I am deeply indebted to my supervisors Professor David Greenaway and Dr.Richard Kneller for their stimulating suggestions, guidance and encouragement throughout my PhD study. They generously spent their time, energy and insights to help me find this interesting topic and shape my understanding of it. I also wish to thank Sue Berry for her friendly and efficient assistance in organizing those fortnightly supervision meetings over more than three years.

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“…Burstein, Neves, and Rebelo (2003), Goldberg and Campa (2006), and Choudri, Faruqee, and Hakura (2005) emphasize the importance of a distribution sector in accounting for exchange rate pass-through. Each of these papers shows that incorporating a distribution sector into an otherwise standard model improves the ability of the model to explain observed rates of exchange rate pass-through.…”

Section: Introductionmentioning

confidence: 99%

Border prices and retail prices

Berger

Faust²,

Rogers

et al. 2012

Journal of International Economics

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We analyze retail prices and at-the-dock (import) prices of speci…c items in the Bureau of Labor Statistics'(BLS) CPI and IPP databases, using both databases simultaneously to identify items that are identical in description at the dock and when sold at retail. This identi…cation allows us to measure the distribution wedge associated with bringing traded goods from the point of entry into the United States to their retail outlet. We …nd that overall U.S. distribution wedges are 50-70%, around 10 to 20 percentage points higher than that reported in the literature. We discuss the implications of this for measuring the size of the "pure" tradeables sector, exchange rate pass-through, and real exchange rate determination. We …nd that distribution wedges are very stable over time but there is considerable variation across items. There is some variation across the country of origin for the imported item, for our major trading partners, but not as much as the cross-item variation. We also investigate the determinants of distribution wedges, …nding that wedges do not vary systematically with exchange rates, but are related to other features of the micro data.

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Explaining the exchange rate pass-through in different prices

Cited by 115 publications

References 42 publications

Price Adjustment and Exchange Rate Pass-through

Price Adjustment and Exchange Rate Pass-through

Exchange Rates and Exports: Evidence from Manufacturing Firms in the UK

Border prices and retail prices

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