Slow Passthrough Around the World: A New Import for Developing Countries?

Abstract

Developing countries traditionally exhibit passthrough of exchange rate changes that is greater and more rapid than high-income countries, but have experienced a rapid downward trend in recent years in the degree of short-run passthrough, and in the adjustment speed. As a consequence, slow and incomplete passthrough is no longer exclusively a luxury of industrial countries. Using a new data set prices of eight narrowly defined brand commodities, observed in 76 countries we find empirical support for some of the factors that have been hypothesized in the literature, but not for others. Significant determinants of the passthrough coefficient include per capita incomes, bilateral distance, tariffs, country size, wages, long-term inflation, and long-term exchange rate variability.Some of these factors changed during the 1990s. Part (and only part) of the downward trend in passthrough to imported goods prices, and in turn to competitors' prices and the CPI, can be explained by changes in the monetary environment. Real wages also work to reduce passthrough to competitors' prices and the CPI, confirming the hypothesized role of distribution and retail costs in pricing to market. Rising distribution costs, due perhaps to the Balassa-Samuelson-Baumol effect, could contribute to the decline in the passthrough coefficient in some developing countries.

Exploring the Relationship between the CPI and the PPI: The Colombian Case

“…8, No. 17;2013 analogous to the one found using the CPI excluding services and the end-consumption PPI, the leadership in this case is stronger, as seen in the p-value in the right panel. However, if the PPI-100 and the CPI-100 are compared using the same weights, in this case those of the CPI, it is possible to conclude the PPI-100 leads the CPI-100 by two months (see Figure 4).…”

“…8, No. 17;2013 marketing goods, and different degrees of tradability of the goods in the supply chain. However, as will be shown in the Colombian case, the most important issue is elimination of the methodological differences between the two baskets to be able to find the actual existing link between the CPI and the PPI.…”

“…8, No. 17;2013 coincidence relationship between the PPI and the CPI. This simultaneity between the prices of both these baskets has been explained in international literature by factors such as methodological and conceptual differences, price controls, demand and supply factors, and adjustments in retail margins, among others.…”

Measuring Long-Run Exchange Rate Pass-Through

“…Moreover, the acceptance of the euro as an invoice currency may take far longer than we are able to pick up in our short sample. Next, as indicated by Frankel, Parsley and Wei (2005), the effect of exchange rate volatility on the pass-through is often negative. The euro can be expected to have reduced the 'noise' in the exchange rate movements, especially for countries such as Italy, Spain and Portugal.…”

“…A large number of recent papers (see for example Campa and González Mínguez, 2006;Campa, Goldberg and González Mínguez, 2005;Frankel, Parsley and Wei, 2005;Marazzi et al, 2005) have investigated the issue of exchange rate pass-through (ERPT) of foreign to domestic prices. Studies of ERPT have been conducted both for the United States and for countries of the euro area, with a particular focus on its evolution over the past two decades, in response to changes in institutional arrangements (such as the inauguration of the euro area) and to monetary and financial shocks (such as Black Wednesday and the ERM crisis in 1992).…”