Abstract
The response of import prices to exchange rates can be used to predict the effect of changes in trade policy. The hypothesis of symmetric pass-through of tariffs and exchange rates asserts that the effect of tariffs and exchange rates on prices are identical. This paper examines whether the symmetry hypothesis holds in the context of invoicing currency, by investigating the role of the euro and the U.S dollar currencies. The paper uses transaction-level data of Malawian imports from the European Union (EU) over a 12-year period, separating imports from the Economic and Monetary Union (EMU) members and non-members and across sectors. The findings show that the dollar has the highest invoicing share, and the pass-through rate of exchange rate and tariff shocks on to Malawian consumers is high. Symmetry holds when bilateral exchange rates are used, but when the invoicing currency is considered there are deviations from symmetry. This result implies that to predict the effects of trade policy based on import prices' responses to the exchange rate, bilateral exchange rates are not suitable for capturing exchange rate and tariff pass-through. The variations in the results across EMU and non-EMU, currencies, and industries demonstrates that that empirical evidence is needed in each case to understand the extent of pass-through, which is crucial for import-dependent developing countries such as Malawi.
Highlights
Trade prices are a principal channel through which movements in the exchange rate and changes in trade policy affect domestic variables for an open economy
Using highly disaggregated customs level data, this paper provides, to my knowledge, the first empirical evidence on the role of invoicing currencies in both exchange rate and tariff pass-through to import prices for a developing country
The results show that, on average, the pass-through rate of exchange rate and tariff shocks on to Malawian consumers is high with some variations across products, countries and invoicing currencies
Summary
Trade prices are a principal channel through which movements in the exchange rate and changes in trade policy affect domestic variables for an open economy. Symmetric passthrough of tariffs and exchange rates to prices could allow the response of import prices to exchange rates to be used to predict the effect of changes in tariffs (Feenstra, 1989). This can be useful in the analysis of trade policy. An increase in tariffs may lead foreign exporters to that country to lower prices and the tariff is less than fully passed through in prices, and the importing country experiences a terms-of-trade gain These issues are of particular relevance to developing economies given that most trade takes place in the U.S dollar, they have relatively higher tariffs, and they are subject to relatively larger exchange rate changes
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.