Estimates Of Exchange Rate Pass-through Research Articles

Estimation of Exchange rate pass-through in Iran’s multiple exchange rate system

Estimation of Exchange rate pass-through in Iran’s multiple exchange rate system

Exchange rate pass-through in emerging Asia and exposure to external shocks

Using a time-varying parameter SVAR model over the period 1994 to 2021, this paper provides estimates of exchange rate pass-through (ERPT) to both producer and consumer prices for nine emerging Asian economies. We also examine the role of four global shocks as propagation channels to both producer and consumer price ERPT, specifically via oil prices, global output, US monetary policy, and the VIX. Our main findings are: (i) ERPT is incomplete and mostly higher for ERPT to producer than consumer prices; (ii) longer-term ERPT to producer and consumer prices is mostly greater in magnitude than shorter-term ERPT; (iii) ERPT has been declining for most Asian EMEs since around 2010; (iv) oil price and global output shocks mostly affect longer-term producer price ERPT in emerging Asia; and (v) US monetary policy and VIX shocks mostly affect longer-term consumer price ERPT in emerging Asia.

Döviz Kurunun Yurt İçi Fiyatlara Geçiş Etkisinin Yumuşak Geçişli Regresyon Modeliyle Tahmini

Döviz kurundaki değişimin yurt içi fiyatlar üzerindeki etkisinin bilinmesi enflasyon hedeflemesi stratejisini benimseyen ekonomiler için oldukça önemlidir. Türkiye’de ithal ara malı kullanımı yüksek olduğundan, başta Merkez Bankası olmak üzere iktisadi birimler döviz kurunun fiyatlara geçiş etkisini yakından takip etmektedir. Bu nedenle, geçiş etkisi güncel olarak araştırılması gereken bir konudur. Doğrusal modeller kullanılarak yapılan çalışmalarda geçiş etkisinin simetrik olduğu varsayılmaktadır. Bu çalışmanın amacı, enflasyon düzeyinin, döviz kurunun tüketici fiyatlarına geçiş etkisini azaltacağı yönündeki Taylor(2000) hipotezinin geçerliliğini Türkiye için incelemektir. Bu incelemede doğrusal olmayan zaman serisi yöntemlerinden yumuşak geçişli regresyon modelden (STR modelinden) yararlanılmıştır. Bu amaçla 2004:01–2018:07 dönemine ilişkin aylık veriler kullanılmıştır. Yıllık tüketici fiyat enflasyonu %7’yi aştığında döviz kurunun tüketici fiyatlarına geçiş etkisi %7,6’dan %11,6’ya çıkmaktadır. Aynı şekilde yıllık üretici fiyat enflasyonu %4,4’ü aştığında döviz kurunun üretici fiyatlarına geçiş etkisinin %24,1’den %37,5’e çıktığı görülmüştür. Çalışmanın sonunda döviz kurunun üretici ve tüketici fiyatlarına geçiş etkisinin enflasyon düzeyine göre doğrusal olmadığı ortaya konulmuş ve Taylor(2000) hipotezinin ilgili dönemde Türkiye’de geçerli olduğu sonucuna ulaşılmıştır.

The shocks matter: Improving our estimates of exchange rate pass-through

A major challenge for monetary policy is predicting how exchange rate movements will impact inflation. We propose a new focus: directly incorporating the underlying shocks that cause exchange rate fluctuations when evaluating how these fluctuations “pass through” to import and consumer prices. A standard open-economy model shows that the relationship between exchange rates and prices depends on the shocks which cause the exchange rate to move. We build on this to develop a structural Vector Autoregression (SVAR) framework for a small open economy and apply it to the UK. We show that prices respond differently to exchange rate movements based on what caused the movements. For example, exchange rate pass-through is low in response to domestic demand shocks and relatively high in response to domestic monetary policy shocks. This framework can improve our ability to estimate how pass-through can change over short periods of time. For example, it can explain why sterling's post-crisis depreciation caused a sharper increase in prices than expected, while the effect of sterling's 2013–15 appreciation was more muted. We also apply this framework to forecast the extent of pass-through from sterling's sharp depreciation corresponding to the UK's vote to leave the European Union.

Value-Added Trade, Exchange Rate Pass-Through and Trade Elasticity: Revisiting the Trade Competitiveness

How is exchange rate pass-through (ERPT) measures affected by increasing participation in global value chains? This paper measures ERPT for value-added trade, where intermediate inputs are shared among countries in a back-and-forth manner for producing a single final product. Estimation of pass-through was done using World Input-Output Database (WIOD), World Economic Outlook (WEO), and OECD statistics. Empirically estimated findings suggest that ignoring the value-added trade will cause a systematic upward bias in the estimation of ERPT. From empirical investigation, it is also evident that there exists substantial heterogeneity in pass-through rates across sectors: sectors with high-integration into global market functions with a lower rate of exchange in comparison to sectors with less integration.

Exchange Rate Pass-through to Domestic Prices

This study makes an attempt to examine the exchange rate pass-through (ERPT) to domestic prices in the post-reform period in India. It also analyzes the effect of global financial crisis of 2007 on the ERPT. It has used the standard vector auto-regression (VAR) model taking five variables (viz., exchange rate, oil price, output gap, money supply and wholesale price index (WPI)) for analysis. Using impulse response function, the study finds that a 10 per cent depreciation in rupee (`) results in 0.011 per cent rise in WPI after one month. It found moderate ERPT estimates ranging from 0.01112 per cent (after first month) to 0.01197 per cent (after six months). The cumulative pass-through is found to be 0.07 for one month, it is stabilized at 0.06. The main drivers of price change are identified through variance decomposition. Persistently rising WPI and the oil price hike are found as the main drivers of price rise. Pressure of exchange rate on the WPI is found to be very modest, that is, about 7 per cent. Using the Quandt-Andrews Unknown Breakpoint test, the study found a structural break at November 2007, but the effect of the crisis on ERPT is found to be insignificant. The study explains the low ERPT in terms of India’s large import size and its composition in favour of raw materials and intermediary goods, exchange rate volatility and moderate inflation. It reduces the apprehension of domestic price instability arising from the floating exchange rate.

Pricing strategy of emerging market exporters in alternate currency regimes: The role of comparative advantage

The exchange rate pass-through (ERPT) literature has not considered product-level comparative advantage (CA) as a source of heterogeneous firm productivity, whilst the heterogeneous-firm trade literature suggests that a firm's production choice may determine its productivity level and also its pricing decision as both the degree of market power and the fixed costs of exporting vary across products. This paper combines these two strands of literature and empirically analyses the export pricing behaviour of Chinese and Indian exporters in 1994–2007 whilst considering 6-digit product-level CA at the intercept and at the slope. Previous ERPT estimates that did not take product-level CA into account are biased as CA is significant in both cases. ERPT is more incomplete in high CA products but export prices increase with export specialization because a stronger presence in export markets allows higher market power. If China were to let its currency float, Chinese exporters' pricing strategy would become a classic case of incomplete ERPT. On the contrary, Indian exporters' pricing strategy remains robust regardless of the exchange rate regime. This result supports recent calls for the adoption of a flexible exchange rate regime, particularly in the case of China.

The Exchange Rate Pass-Through in the New EU Member States

This paper aims to complete our understanding of the relationship between changes in nominal effective exchange rates and prices in the new EU member states. We investigate the exchange rate pass-through to import, producer and consumer prices for ten Central and Eastern European countries with quarterly data from January 1996 to June 2010. In a first step, the pass-through estimates are derived from a dynamic panel data model, through the generalized method of moments. A statistically significant exchange rate pass-through to import prices is found, while no statistically significant exchange rate pass-through is estimated to consumer and producer prices. We further investigate whether exchange-rate pass-through estimates have declined in response to a change in inflation environment and find evidence of such decline only for import prices, both in the short run and the long run. In a second step, we proceed to an individual analysis, country by country, and find support for an increased heterogeneity in the exchange rate pass-through estimates. We equally test for the stability of the estimated.

Recent estimates of exchange rate pass-through to import prices in the euro area

This paper provides an update on the exchange rate pass-through (ERPT) estimates for 12 euro area (EA) countries. First, based on quarterly data over the 1990–2012 period, the study does not find a significant heterogeneity in the degree of pass-through across the monetary union members, in contrast to previous empirical studies. As the authors use a longer time span for the post-EA era than existing studies, this is not surprising, since the process of monetary union has entailed some convergence towards more stable macroeconomic conditions across EA member states. Second, when assessing the stability of pass-through elasticities, the authors find very weak evidence of a decline around the inception of the euro in 1999. However, their results reveal that a downtrend in ERPT estimates became apparent starting from the beginning of the 1990s. This observed decline was synchronous to the shift towards reduced inflation regimes in their sample of countries. Finally, the authors notice that the distinction between “peripheral” and “core” EA economies in terms of pass-through has significantly decreased over the last two decades.

Recent Estimates of Exchange Rate Pass-Through to Import Prices in the Euro Area

This paper provides an update on the exchange rate pass-through (ERPT) estimates for 12 euro area (EA) countries. First, based on quarterly data over the 1990-2012 period, our study does not find a significant heterogeneity in the degree of pass-through across the monetary union members, in contrast to previous empirical studies. As we use a longer time span for the post-EA era than existing studies, this is not surprising, since the process of monetary union has entailed some convergence towards more stable macroeconomic conditions across EA member states. Second, when assessing the stability of pass-through elasticities, we find very weak evidence of a decline around the inception of the euro in 1999. However, our results reveal that a downtrend in ERPT estimates became apparent starting from the beginning of the 1990s. This observed decline was synchronous to the shift towards reduced inflation regimes in our sample of countries. Finally, we notice that the distinction between “peripheral” and “core” EA economies in terms of pass-through has significantly decreased over the last two decades.

Exchange rate pass-through and the frequency of price adjustment across different inflation regimes

The paper explores the link between the inflationary environment and the size of the exchange rate pass-through (ERPT) into domestic prices, as inflation descends from an extreme, second highest and second longest hyperinflation in the 20th century, to high and then moderate inflation in Serbia. We found that ERPT decreases with a decline in the inflation level, variability and persistence, thus supplementing findings previously acquired in panel studies across countries. Our findings can be explained by surging empirical evidence on state contingent behavior of pricing, which indicates a sharp increase in the frequency of price adjustment as one moves from moderate, via high to hyperinflation, suggesting that the degree of price rigidities is a key determinant of the size and speed of ERPT. ERPT estimates are embedded in careful analysis of inflation episodes in Serbia, showing that hyper and high inflation episodes subscribe to the same, fiscal explanation, as opposed to the moderate inflation ones, where supply and demand shocks have been the main inflation drivers.

The Effect of Exchange Rates on the Costs of Exporters When Inputs Are Denominated in Foreign Currencies

Econometric estimates of exchange rate pass-through usually assume that 100% of the exporter’s costs are denominated in the exporter’s currency. However, the literature on trade in value added indicates that a country’s exports often include imported intermediates with costs that may be denominated in other currencies. Using international input–output tables, we analyze whether unrealistic assumptions about the currency denomination of costs can explain some of the evidence of partial exchange rate pass-through in the econometrics literature. We find that models of exchange rate pass-through that rely on the usual cost assumption are likely to significantly understate pass-through rates.

Recent Estimates of Exchange Rate Pass-Through to Import Prices in the Euro Area

This paper provides an update on the exchange rate pass-through (ERPT) estimates for 12 Euro area (EA) countries. First, based on quarterly data over the 1990-2012 period, our study does not find a significant heterogeneity in the degree of pass-through across the monetary union members, in contrast to previous empirical studies. As we use a longer time span for the post-EA era than existing studies, this is not surprising, since the process of monetary union has entailed some convergence towards more stable macroeconomic conditions across Euro Area (EA) Member States. Second, when assessing the stability of pass-through elasticities we find very weak evidence of a decline around the inception of the Euro in 1999. However, our results reveal that a downtrend in ERPT estimates became apparent starting from the beginning of the 1990s. This observed decline was synchronous to the shift towards reduced inflation regimes in our sample of countries. Finally, we notice that the distinction between “peripheral” and “core” EA economies in terms of pass-through has significantly decreased over the last two decades.

Introduction to a Special Section on ‘Exchange Rate Pass-through in Developing and Emerging Markets’

The interest in exchange rate pass-through (ERPT) in emerging market and developing economies has burgeoned in the last two decades. Small, open and trade-dependent economies embody special features that can make it difficult to obtain reliable estimates of ERPT. This Special Section includes a survey of recent research in developing and emerging market countries on ERPT, focusing on the monetary policy relevance of ERPT.The frequent misspecifications that produce unreliable ERPT estimates are highlighted. Many empirical issues raised in the survey are illustrated by the macro- and the micro-economic empirical studies on South Africa (SA) included in this Special Section, and an earlier published JDS paper on ERPT in SA.

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

Global integration has increased the international linkages of financial markets for emerging market countries. A key channel for the international transmission of inflation and economic cycles is from exchange rate movements to domestic prices, known as exchange rate pass-through (ERPT). This article reviews the conceptual, methodological and policy issues connected with ERPT in emerging market and developing countries, and critically surveys selected empirical studies. A key contribution is to categorise and compare the heterogeneous methodologies used to extract ERPT measures in the empirical literature. Single equation models and systems methods are contrasted; frequent misspecifications that produce unreliable ERPT estimates are highlighted. The discerning policy-maker needs to ascertain by which methods ERPT measures were calculated, the controls and restrictions applied, and the time frame and stability of the estimates.

International Trade Price Stickiness and Exchange Rate Pass-Through in Micro Data: A Case Study on US-China Trade

The interaction between the exchange rate regime, trade firms' price-setting behavior, and exchange rate pass-through (ERPT) is an important topic in international economics. This paper studies this using a goods-level dataset of US-China trade prices collected by the US Bureau of Labor Statistics. We document that the duration of US-China trade prices has declined almost 30% since China abandoned its hard peg to the US dollar in June 2005. A benchmark menu cost model that is calibrated to the data can replicate the documented decrease in price stickiness. We also estimate ERPT of Renminbi (RMB) appreciation into US import prices between 2005 and 2008. Goods-level data allows us to estimate that the lifelong ERPT is close to one for goods that have at least one price change, but less than one-half when all goods are included. This finding can be attributed to the fact that around 40% of the goods never experienced a price change, and supports the hypothesis that price changes that take the form of product replacements may bias ERPT estimates downwards.

The Estimation of Exchange Rate Pass-through on Korean Export Price Using Panel Data

The Estimation of Exchange Rate Pass-through on Korean Export Price Using Panel Data

The exchange rate pass-through in the new EU member states

This paper aims to complete our understanding of the relationship between changes in nominal effective exchange rates and prices in the new EU member states. I investigate the exchange rate pass-through to import, producer and consumer prices for ten Central and Eastern European countries with quarterly data from January 1996 to December 2011. In a first step, the pass-through estimates are derived from a dynamic panel data model through the generalized method of moments. A statistically significant exchange rate pass-through to consumer, producer and import prices is found, both in the short and long run. In a second step, I proceed to an individual analysis, country by country, and find support for an increased heterogeneity in the exchange rate pass-through estimates. In a third step, I assess the drivers of the estimated exchange rate pass-through coefficients and find support for a significant impact of exchange rate volatility, inflation volatility, import dependence, and the output gap, as well as the global outlook.

International Trade Price Stickiness and Exchange Rate Pass-through in Micro Data: A Case Study on U.S.–China Trade

The interaction between the exchange rate regime, trade firms' price-setting behavior, and exchange rate pass-through (ERPT) is an important topic in international economics. This paper studies this using a goods-level dataset of US-China trade prices collected by the US Bureau of Labor Statistics. We document that the duration of US-China trade prices has declined almost 30% since China abandoned its hard peg to the US dollar in June 2005. A benchmark menu cost model that is calibrated to the data can replicate the documented decrease in price stickiness. We also estimate ERPT of RMB appreciation into US import prices between 2005 and 2008. Goods-level data allows us to estimate that the lifelong ERPT is close to one for goods that have at least one price change, but less than one-half when all goods are included. This finding can be attributed to the fact that around 40% of the goods never experience a price change, and supports the hypothesis that price changes that take the form of product replacements may bias ERPT estimates downwards.

Exchange rate pass-through in central and eastern European EU Member States

This paper provides estimates of exchange rate pass-through (ERPT) to consumer prices for nine central and eastern European Member States. Using a five-variate cointegrated VAR (vector autoregression) for each country and impulse responses derived from the VECM (vector error correction model), we show that ERPT to consumer prices averages about 0.6 using the cointegrated VAR and 0.5 using the impulse responses. We also find that the ERPT seems to be higher for countries that have adopted some form of fixed exchange rate regime. These results are robust to alternative normalisation of the VAR and alternative ordering of the impulse responses.