Domestic Prices Research Articles

State‐Dependent Exchange Rate Pass‐Through

ABSTRACTWe estimate how the rate of pass‐through from the exchange rate to domestic prices varies across states of the economy and depending on the shocks that drive fluctuations in the exchange rate. We confirm several results from the literature and uncover new facts. Drawing on the experience of a large sample of advanced and emerging market economies over the past 30 years, we document that exchange rate pass‐through is significantly larger during periods of elevated uncertainty and when inflation is high. Using a novel identification strategy, we also show that pass‐through is higher when exchange rate fluctuations are driven by U.S. monetary policy.

Exchange Rate Pass-Through on Prices in Nigeria—A Threshold Analysis

Persistent exchange rate depreciation and its debilitating effects on rising inflation have remained a concern in Nigeria. This article explores the effects of exchange rate pass-through on producer prices, consumer prices, export prices, import prices and the Taylor rule from 2000 to 2023, using quarterly data and adopting threshold autoregression and self-exciting smooth threshold regression methods. The findings suggest that there are non-linearities in the way that exchange rate depreciation affects prices in Nigeria. Furthermore, the findings suggest a threshold of 5 percent depreciation. Two sub-sample analyses corroborate the main findings, showing that a threshold of 5 percent is the optimum benchmark if demand and supply are not to be weakened. At this level or below, the effects of exchange rate depreciation on inflation are much lower, even though prices will rise. However, above this benchmark, the effects of depreciation on inflation are much larger, weakening consumer demand for both imported and domestic goods as well as producer supply of both exported and domestic goods and services in the economy. This result implies that an average exchange rate depreciation not higher than 5 percent within a quarter is reasonable if the Nigerian economy is to remain competitive both domestically and globally. Finally, the results suggest that the exchange rate pass-through to prices is considerably higher in Nigeria below the threshold, while it overshoots for producer prices, export prices, and import prices above the threshold. To keep inflation in check, this paper suggests that the monetary authorities should try to keep exchange rate depreciation below the established thresholds, while also considering adjusting the policy rate to take into account the exchange rate depreciation thresholds in order to keep domestic prices stable.

Exchange Rate Pass-Through into Import Prices: Evidence from Türkiye during 2010-2020 Period

This article analyses pass through of exchange rates into the import prices for an emerging economy, Türkiye, which faced severe fluctuations in the nominal exchange rate in the recent years, and experienced significant increases in domestic prices. The Turkish economy continues to struggle due to high inflationary pressures and a steep Turkish Lira (TL) devaluation particularly after 2017. This study aimed at examining the relationship between exchange rate and import prices using quarterly data for the period of 2010q1-2019q1, while the empirical methodology is framed in the multivariate cointegration analysis, along with the application of the Johansen cointegration test and the development of an autoregressive error correction vector for the determination of the pass-through in the long term. Our findings show that 85.6% of the fluctuations of the nominal exchange rate are transmitted to the import prices in the mentioned period, slower than the findings of the study by Akgunduz and his colleagues as the difference of import prices from its long-run relationship implied by the real exchange rate is likely dominated by energy prices in a strong manner. Second significant finding derives from the parameter that measures the speed of the pass-through, whose estimate has been found as -0.0125, inferring that the adjustment in short-term imbalances between import prices and the nominal exchange rate through changes in import prices is rather slow.

The Imported Challenge: Economic Impact of Fresh Fruit and Vegetable Imports on U.S. Producers

Abstract Domestic fruit and vegetable producers contend that rising imports during seasonal harvesting windows have negatively impacted domestic prices and revenue. This study simulates producers’ revenue with the removal of above-average imports as defined by the U.S. International Trade Commission. Results indicate significant additional revenues to domestic producers in the simulated scenario. Also, additional revenues to producers by state and season show substantial heterogeneity with robustness checks revealing similar patterns. Options such as risk management and technological improvements are needed to enhance the competitiveness of U.S. fresh produce industries instead of limiting imports in the absence of illegal dumping.

Local agricultural markets and external shocks – the case of Poland

Abstract We quantify the role of individual factors in shaping the domestic prices of selected grains and oilseeds in Poland and test the hypothesis of whether a favorable supply situation can isolate the domestic market from external shocks. We carried out estimations using error correction and local projection econometric models. The results lead to the following conclusions. First, futures contracts have a significant impact on domestic prices of wheat, corn, and rapeseed. Second, an important factor that determines the prices of wheat, corn, and rapeseed is the EUR/PLN exchange rate. However, the strength of this influence and its time horizon differs strongly depending on the analyzed commodity. Third, the influence of other factors is limited. The obtained results indicate that Poland’s relatively high degree of self-sufficiency in the production of wheat, corn, and rapeseed does not isolate the prices of these agricultural commodities from the impact of external factors.

ARMA-Based Inflation Forecasting Under the Inflation Targeting Framework in Sri Lanka

Inflation targeting has been introduced as one of the monetary policy framework since the end of the 1990s. Forecasting inflation under the inflation-targeting monetary policy framework is also expected to improve with superior performance by constantly feeding updated information into the forecasting process, considering the domestic and global market conditions and developments. Literature evidence that inflation forecasting under inflation targeting is a challenging task with risk and uncertainty that are not easy to capture even in the latest modeling techniques. Inflation-targeting monetary policy was adopted by the Central Bank of Sri Lanka after the enactment of the Central Bank of Sri Lanka Act with effect from 15.09.2023. This study examines inflation forecasting under the inflation-targeting monetary policy in Sri Lanka implemented with a clear mandate assigned in the agreement for a flexible inflation targeting framework to guide the market and inflation expectations. Automatic ARIMA forecasting techniques are employed to forecast inflation using two series of price indices with different base years from 2016M01 to 2026M12, and 2022M01 to 2026 M12 including 30 months as forecasting length. According to the findings, inflation forecasting is in line with the 5 percent targeted level with a 3 percent margin to fluctuate for both sides subject to the upside and downside risk factors. Accordingly, Inflation forecasting is within the inflation projections indicated under the inflation fan chart. It further suggests that inflation has been gradually stable in SL compared to the recently elevated inflation experience. Therefore, inflation targeting and projections can be used to shape and guide market expectations to facilitate decision-making in forward looking policies toward achieving and maintaining domestic price stability, which is the primary objective of the Central Bank of Sri Lanka.

Exchange Rate Pass-Through to Provincial Consumer Prices: A Geographical-Goods Level Analysis

This study investigates exchange rate pass-through (ERPT) to provincial consumer prices in Canada from a geographical and goods-specific perspective. ERPT refers to the extent in which changes in the exchange rate influence domestic price movements. For example, a depreciation of the Canadian dollar relative to the U.S. dollar may increase the price of imports into Canada from the U.S., thereby raising consumer prices in Canada. Using extensive datasets from 2000 to 2023, this research quantifies the magnitude and speed of ERPT across various provinces and consumer price index (CPI) categories. The methodology employs a regression model framework, building upon the approach of Savoie-Chabot and Khan (2015) to estimate the impact of short-run and long-run exchange rate fluctuations on consumer prices. The findings highlight significant regional and categorical variation in ERPT. For example, Alberta exhibits the highest short-run ERPT for energy consumer prices where a 1% increase in the exchange rate leads to a 0.60% increase in prices. In contrast, Quebec exhibits the lowest short-run ERPT for energy consumer prices where a 1% increase in the exchange rate leads to only a 0.18% increase in prices. Price responses in each of these provinces differs from the short-run ERPT of Canada which is 0.32%. Furthermore, energy prices exhibit the highest sensitivity to exchange rate fluctuations, while most often categories excluding energy show minimal impact. These results emphasize the importance of region-specific economic policies to address distinct provincial price responses to exchange rate fluctuations. This study offers valuable insights for policymakers to develop strategies that mitigate any adverse economic effects of exchange rate changes and promote regional economic stability and growth.

Implementation of anti-dumping duties on iron and steel products: Effects on the Indonesian economy

This research aims to empirically study the impact of Indonesia's anti-dumping measures on the performance of related imported products in 2011. Using the GTAP-E model, the region is divided into 9 regions and the industrial sector is grouped into 2 industries. Empirical results indicate that the imposition of a 20% Anti-Dumping Duty (BMAD) is ineffective in restricting trade from targeted countries. The GDP of non-targeted countries increased, but international trade balances correlated negatively with each BMAD imposition. Additionally, domestic prices in Indonesia appear to be high due to the implementation of BMAD, which has resulted in increased prices of iron and steel in the domestic market.

New Insights into Domestic Price Drivers of Crude Oil Futures Markets: Evidence from Quantile ARDL Approach

New Insights into Domestic Price Drivers of Crude Oil Futures Markets: Evidence from Quantile ARDL Approach

Pegged exchange rate regime and its impact on inflation in BRICS nations: Country-wise evidence

During the 1990s and 2000s, many developing nations accepted fixed exchange rate regimes to sustain price stability. By pegging their currencies to an anchor currency (i.e. US dollar), developing countries could bring credibility and confidence into their economies. The study tries to analyse the impact of the pegged exchange rate regime on inflation in BRICS countries for the period spanning from 2003 to 2022. The result points to the loss of monetary policy autonomy due to the ‘impossible trinity’ coming into play with a steady increase in capital inflows. The country’s large trade surpluses and extensive trade relationships may buffer the impact of exchange rate fluctuations on domestic prices, as changes in the exchange rate may be absorbed by changes in trade volumes or pricing strategies. Other factors like demographic trends or government interventions in markets could overshadow the influence of the exchange rate regime on inflation. The impact of changes in the exchange rate regimes on inflation may operate with lags, meaning that any effects may not be immediately observable in the data. The analysis in this study proposes that exchange rate regimes choice and money supply influence the inflation dynamics in the BRICS countries. It merely reflects the success of the central bank in neutralizing its very effort of maintaining the pegged rate, which gives rise to inflationary growth of the money supply.

Does the Exchange Rate Have a Pass-Through Effect on Domestic Food Prices in Türkiye? An Empirical Study Using a Combined ANN Algorithm and VAR Method

Exchange rate fluctuations have far-reaching consequences for national economies, companies and, above all, consumers. It is therefore important to understand the mechanisms by which these fluctuations affect food prices in domestic markets. In this context, we examine the complex relationship between exchange rates and domestic food prices and attempt to calculate the pass-through effect of the exchange rate on domestic prices. To examine the pass-through effect of the exchange rate on food prices, we use monthly USD/TRY exchange rate data from January 2003 to July 2023 as well as the global food price index, the export-import rate for food and the producer price index for food in Türkiye. We employ the vector autoregression (VAR) method to determine the optimal lags of the variables included in the analysis and the artificial neural network (ANN) algorithm to calculate the overall pass-through effect of the USD/TRY exchange rate on domestic food prices. The results show that the pass-through effect of the variable on food prices persists for three months: the current month, the previous month and the two previous months. The total pass-through effect of the exchange rate on food prices reaches up to 27%. Half of this impact comes from the previous month's food prices. In addition, the ratio of food exports to imports accounts for about 12% of the increase in domestic food prices. The results also show that the variable with the highest pass-through effect is the producer price index and that 90% of the increase in food prices is due to domestic dynamics, while the effect of price increases in foreign markets is only about 10%.

Did the entry of the corn ethanol industry in Brazil affect the relationship between domestic and international corn prices?

AbstractThis study investigates the relationship between corn prices in Brazil and the international market, considering a rise in corn ethanol production in Brazil's Midwest region since 2017. Did the entry of the corn ethanol industry in Brazil affect the relationship between domestic and international corn prices? A cointegration analysis was made with a monthly time series from May 2005 to August 2023 controlling for different exogenous events or shocks that may have affected global agricultural markets. The study's findings indicate a stable long‐term relationship between the international and Brazilian corn prices, with changes in international prices being predictors of variations in Brazilian domestic prices, while the opposite was not statistically supported. The study also found no evidence to support the claim that the entry of the corn ethanol industry into Mato Grosso state in 2017 impacted the prices paid to local producers. Therefore, the increase in Brazilian corn prices cannot be attributed to additional demand for corn by local mills, an important result that contributes to discussions such as food versus fuel and indirect land use change.

Relationship Between Exchange Rate and Inflation in Afghanistan

Afghanistan is an import dependent country and has been facing perpetual trade balance deficit for decades. In case of imperfect competition in the market or existence of market monopoly, there is a higher chance of reflecting the exchange rate changes on the prices of the goods. In Addition, countries with low level of domestic production and higher amounts of imports usually experience higher degree of the exchange rate pass-through effect on inflation. Countries with high import volumes and low export levels often face a deficit in foreign currency inflows and an excess in outflows. These countries need substantial foreign currency to purchase and import goods from both neighboring and international markets, increasing domestic demand for foreign currencies and consequently leading to domestic currency depreciation. This study investigated the relationship between exchange rates and inflation in Afghanistan, examining how exchange rates impact inflation and the benefits associated with exchange rate mechanisms. The primary research questions include: What is the relationship between exchange rates and inflation in Afghanistan? How does the exchange rate influence inflation in the country? What are the benefits of exchange rate systems? The hypothesis posits that higher inflation typically depresses a country's currency value and that exchange rates directly affect inflation. Additionally, exchange rates determine the value of currency exchanges between different nations. This research aims to elucidate the relationship between exchange rates and inflation in Afghanistan, assess the impact of exchange rates on inflation, and explore the benefits of exchange rate systems. The methodology involves a binary system and utilizes secondary data collected from books, websites, and research papers. Findings indicate that Afghanistan's reliance on imports results in a persistent trade balance deficit, with a significant portion of goods, especially non-food items, being imported due to insufficient domestic production. To import goods, Afghanistan requires foreign currencies, which are typically earned through exports of goods and services as of a result, Afghanistan will experience stability in the exchange rate and in the domestic prices.

Inflation-balance of trade nexus in Nigeria: The impact of exchange rate pass-through

The relationship between exchange rate (EXR) and foreign trade (FT) in Nigeria has been a contentious issue since Nigeria’s independence in 1960. This study investigated the link between exchange rate and foreign trade through the prism of exchange rate pass-through (EXRPT) to domestic prices, utilizing monthly data from 2011 to 2022. The study was built on two models—the base and main models respectively. Employing the VAR technique and its Vector Error Correction Model (VECM) extension, the paper found that EXRPT to consumer prices is incomplete in the short run but its effect was found to be higher on imports than on consumer prices. It follows that the impact of EXRPT diminishes along the price chain. Results from the main model indicate that the impact of domestic prices on balance of trade was found to be negative with elasticity of −0.437541and is also statistically significant, thus, confirming the Marshal-Lenner condition. The Marshal-Lenner condition and findings of this study provide evidence that depreciating exchange rate is not recommended for an import inelastic country like Nigeria.

UNVEILING THE DYNAMICS OF DOMESTIC PRICES OF CACAO BEANS IN INDONESIA

This study is crucial for understanding the factors affecting cacao bean prices in Indonesia. Cacao is a vital commodity in the country's economy, and fluctuations in its price impact various stakeholders. By analyzing these factors, we can make informed decisions benefiting the government, industry, and cacao farmers. The purpose of this study is to analyze the domestic price of cacao beans in Indonesia. The dependent variable in this study is the domestic price of cacao in Indonesia, while the independent variables are volume of cacao bean exports, volume of cacao bean imports, global price of cacao beans, volume of domestic production of cacao beans, Rupiah to USD exchange rate, the federal reserve rate, Gross Domestic Product (GDP) annual growth rate of Indonesia, and export duties imposed on export of cacao beans. This research design utilizes time series data from 1996 to 2022 to analyze the factors influencing the domestic price of cacao beans in Indonesia. The results of the analysis show that the variables of the volume of cacao bean imports, the global price of cacao beans, Rupiah to USD exchange rate, and dummy variable for export duties imposed on export of cacao beans are significant affecting the domestic price of cacao. While volume of cacao bean exports, the federal reserve rate, volume of domestic production of cacao beans and GDP annual growth rate of Indonesia are not significant. The non-significance of volume of cacao bean exports, the federal reserve rate, volume of domestic production of cacao beans, and GDP annual growth rate could be caused by weak relationships, multicollinearity, data issues, or model specification limitations.

The interaction between manufacturer encroachment and gray market

With the rapid development of retail platforms, many manufacturers use retail platforms to encroach into the retail market (i.e., a type manufacturer encroachment) and gray market is increasingly prevalent in various industries. This paper considers a manufacturer who directly sells product 1 in the domestic market and sells product 2 through an incumbent retailer in the overseas market and a gray marketer can divert product 1 across markets without authorized (we call it gray market). In this paper, we examine the interaction between manufacturer encroachment and gray market. We find that when the domestic price of product 1 is sufficiently low, the gray marketer can successfully enter the overseas market without and with encroachment. Second, regardless of whether there is a gray market threat, the manufacturer has an incentive to encroach through retail platform when the commission rate is low. Moreover, the manufacturer’s incentive to encroach varies with the domestic price of product 1 and gray market threat. Finally, manufacturer encroachment can reduce the scale of the gray market and even eliminate the gray market under certain conditions. The gray marketer always suffers from manufacturer encroachment while the retailer can benefit from manufacturer encroachment.

Exchange Rate Pass-Through to Domestic Prices: Is Inflation Targeting an Optimal Policy Choice for Pakistan?

This study investigates the effect of exchange rate dynamics and its impact on consumer prices in Pakistan. Using monthly data for the period 2004- 2022, the Recursive Vector Autoregressive (VAR) technique has been employed for the empirical analysis. The recursive VAR estimation technique yields impulse response functions that demonstrate the incompleteness of exchange rate pass-through (ERPT). The results of the VAR reflect that the consumer prices bring most of the error variance in itself for the period under consideration. The exchange rate has been established to be the second most significant source of variations in consumer prices. The empirical results suggest that the lower ERPT reduces the risk of exchange rate volatility. Hence the monetary authorities may take steps to adopt inflation targeting in Pakistan.

Inflation-balance of trade nexus in Nigeria: The impact of exchange rate pass-through

The relationship between exchange rate (EXR) and foreign trade (FT) in Nigeria has been a contentious issue since Nigeria’s independence in 1960. This study investigated the link between exchange rate and foreign trade through the prism of exchange rate pass-through (EXRPT) to domestic prices, utilizing monthly data from 2011 to 2022. The study was built on two models—the base and main models, respectively. Employing the VAR technique and its Vector Error Correction Model (VECM) extension, the paper found that EXRPT to consumer prices is incomplete in the short run, but its effect was found to be higher on imports than on consumer prices. It follows that the impact of EXRPT diminishes along the price chain. Results from the main model indicate that the impact of domestic prices on balance of trade was found to be negative with an elasticity of −0.437541 and is also statistically significant, thus confirming the Marshal-Lenner condition. The Marshal-Lenner condition and findings of this study provide evidence that depreciating exchange rate is not recommended for an import-inelastic country like Nigeria.

Welfare Effects of Food Tariff Changes on Urban and Rural Households

This study aims to analyze the effects of food tariff changes on the welfare of urban and rural households in Iran. The study considers the role of households as consumers, producers, and workers, as well as the market structure over the past fifteen years. Firstly, the study estimated the consumption behavior for the main food groups using the QUAIDS and pseudo-panel data. Then, the extent of tariff pass-through to domestic food prices was determined, and after that, price-wage elasticity and wage changes as a result of tariff changes were estimated. Finally, it calculated the effect of tariff changes on household purchasing power and income through an indirect utility function to get welfare effects. The results indicate that tariff pass-through to food prices is incomplete and varies between urban and rural areas. The study has found that skilled labor is more sensitive to food tariff reductions than unskilled labor, particularly in rural areas. The results reveal that tariff changes positively affect urban households' welfare, while rural households experience a loss due to these changes. Urban areas benefit from reduced household expenditure, while food prices are increasing in rural areas due to weak or absent tariff pass-through. Although these increases favor producers, they do not compensate for the loss suffered by consumers, resulting in reduced welfare in rural areas. The findings show that the effects of tariff changes vary across regions, not only between urban and rural areas but also among different provinces. Furthermore, the tariff reductions have been a boon for consumers, but a bane for producers, ultimately harming production in the long term. The findings suggest that regional markets may be either sufficient or insufficient to convert pass-through-the-border prices into domestic prices. Therefore, policymakers can use this study as a useful guide to reform the regional market structure to raise household welfare, food security, and income inequality.

The exchange rate pass‐through to domestic prices: A meta‐analysis

AbstractEstimates of the exchange rate pass‐through vary significantly across studies. Therefore, I conduct a meta‐analysis to understand why estimates differ and provide consensus for the conflicting results. The dataset includes 72 primary studies containing 1219 estimates of the pass‐through from nominal effective exchange rates to consumer prices for 111 countries. Because there are many potential causes of heterogeneity, I use Bayesian model averaging to identify the important ones. I find that results vary mainly due to a combination of country‐specific and methodological characteristics, even though factors such as asymmetry and product‐specific characteristics also play a role. The country‐specific characteristics include trade openness, exchange rate flexibility, economic development status, exchange rate persistence, and commodity dependence. On the other hand, the methodological factors include estimation methods, data characteristics, endogeneity bias, and the researcher's choice of control variables. Finally, I model the exchange rate pass‐through, taking into account asymmetry and the best practices in the literature. I find that a 1% increase in the exchange rate leads to a 0.09% decrease in the consumer price level, whereas a 1% decrease leads to a 0.19% increase.