Production sharing and exchange rate pass-through

Abstract

This paper proposes a theoretical background for various possibilities of exchange pass-through and expenditure-switching by introducing an intermediate input sector into Rodriguez-Lopez (2011) model. I show that the degrees of exchange rate pass-through and expenditure switching depend on the shares of imported inputs in total costs. When the imported input shares are located within some range, a low but positive rate of pass-through to aggregate import prices can be derived in the model. In addition, both the size and the direction of expenditure-switching effects vary according to the imported input shares.