The exchange rate pass-through to import and export prices: The role of nominal rigidities and currency choice

Abstract

Using both regression-and VAR-based estimates, the paper finds that the exchange rate pass-through to import prices for a large number of countries is incomplete and larger than the pass-through to export prices. Previous studies have reported similar results, which give rise to the puzzle that while local currency pricing is needed to account for incomplete import price pass-through, it would not imply a lower export price passthrough. Recent explanations of this puzzle have emphasized markup adjustment in response to exchange rate changes. This paper suggests an alternative explanation based on the presence of both producer and local currency pricing. Using a dynamic general equilibrium model, the paper shows that a mix of producer and local currency pricing can explain the pass-through evidence even with a constant markup. The model can also explain the observed exchange rate and inflation variability as well as the fact that the regression and VAR estimates tend to be similar.

Exchange Rate Pass-Through in Developing and Emerging Markets: A Survey of Conceptual, Methodological and Policy Issues, and Selected Empirical Findings

“…52 Moreover, the contribution of exchange rate shocks to price fluctuations declines after the adoption of inflation targeting, unlike in the control group of non-targeters. 53 Choudhri and Hakura (2012) estimate heterogeneous (bi-variate) VARs for ERPT to import and export prices, but find no decline in their emerging market sample for data from 1998 to 2010, compared with 1985-1997. Several studies use interaction methods, with similar findings. 54 Akofio-Sowah (2009) interacts Δe t with currency group dummies in SSA in a regression for CPI inflation.…”

Heads I win; Tails you lose: Asymmetry in Exchange rate Pass-through into Import Prices

“…However, ours is not the first paper to do so. A substantial body of research challenges the received wisdom that exporters treat EMs less favourably than DMs in terms of ERPT (e.g., Bussière and Peltonen, 2008;Brun-Aguerre et al, 2012;Choudhri and Hakura, 2015 Choudhri and Hakura (2006), Ca'Zorzi et al (2007), Mihaljek and Klau (2008), Kohlscheen (2010) and Frankel et al (2012).…”

Exchange Rate Pass-through in South America: An Overview

“…Other studies have also looked at disaggregated measures but have generally focused on import prices rather than an aggregate of traded goods prices. For example, McCarthy, (1999), Hahn (2003), Ca'Zorzi et al (2007), Choudhri and Hakura (2012) and Choudhri, Faruqee and Hakura (2005) estimate VARs with import and/or export prices-in addition to domestic producer and consumer prices-but they do not consider traded goods as a whole.…”