Extent Of Exchange Rate Pass-through Research Articles

Asymmetry of Exchange Rate Pass-through in China's Coastal Regions

Xie, B., 2019. Asymmetry of exchange rate pass-through in China's coastal regions. In: Li, L.; Wan, X.; and Huang, X. (eds.), Recent Developments in Practices and Research on Coastal Regions: Transportation, Environment and Economy. Journal of Coastal Research, Special Issue No. 98, pp. 433–437. Coconut Creek (Florida), ISSN 0749-0208.In the article, the asymmetry of the renminbi (RMB) exchange rate pass-through on the price level in China's coastal areas was investigated. The results showed that the extent of RMB exchange rate pass-through is incomplete. Concerning the asymmetry of the exchange rate pass-through under conditions of RMB appreciation and depreciation alone or the combination with different fluctuation scopes in exchange rate, it was concluded that, when RMB depreciated, the exchange rate pass-through effect was greater by comparison with RMB appreciation. At the same time, the extent of the exchange rate pass-through was more significant as the exchange rate changed sharply; otherwise, no transfer effect was generated.

The Pass‐through of Exchange Rate in the Context of the European Sovereign Debt Crisis

AbstractThis paper investigates whether exchange rate pass‐through (ERPT) into import prices is a nonlinear phenomenon for five heavily indebted Euro area countries, namely the so‐called GIIPS group (Greece, Ireland, Italy, Portugal and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus the German bund) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, that is, when sovereign bond yield spreads exceed a given threshold. For almost all the GIIPS countries, we reveal that the increase in macroeconomic instability and the loss of confidence during the recent sovereign debt crisis have entailed higher sensitivity of import prices to exchange rate movements. For instance, the rate of pass‐through in Greece is equal to 0.66% when the yield differential is below 2.13%, but beyond this threshold level, the sensitivity of import prices becomes higher and reaches full ERPT. Our findings raise the serious question of whether the exchange rate could be an effective tool to boost the trade balance and prevent deflationary threats when financial crisis hits. Copyright © 2015 John Wiley & Sons, Ltd.

Foreign exchange operating exposure and pass-through in a homogeneous product market

Purpose – Operating exposure to foreign exchange risk and exchange rate pass-through are investigated in the context of a Cournot model of equilibrium in a homogeneous product market, i.e. an industry populated by N firms, which compete exclusively on the basis of quantities produced/marketed and where each firm optimizes its decision based on expectations regarding the actions of its rivals that in fact eventuate. Whereas one firm sources its product domestically, the remaining N−1 firms source their product in a foreign country. The paper aims to discuss these issues. Design/methodology/approach – By invoking two simplifying assumptions, namely, constant marginal cost functions and a linear inverted demand curve, and then deriving the Cournot equilibrium, this paper obtains clear implications regarding the effect of a currency devaluation on the competitive positions of the industry’s N constituent firms as well as the pass-through effect on the industry price. Findings – The N−1 firms that source the homogeneous product from a foreign country, which experiences a devaluation, gain, while the single competing firm that sources domestically loses, both market share and profit. Formulas are derived which elucidate this intuitive result. The extent of exchange rate pass-through on the resulting equilibrium price is gauged to be incomplete, consistent with extant empirical evidence. As the number of firms increases, the extent of exchange rate pass-through likewise increases, approaching a limiting situation of complete pass-through. Originality/value – This paper is the first to examine the issues of exchange rate operating exposure and pass-through in the context of a Cournot model of competition, under the indicated two simplifying assumptions.

The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis

This paper investigates whether exchange rate pass-through (ERPT) into import prices is a nonlinear phenomenon for five heavily indebted Euro area countries, namely the so-called GIIPS group (Greece, Ireland, Italy, Portugal, and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus the German bund) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, i.e. when sovereign bond yield spreads exceed a given threshold. For almost all the GIIPS countries, we reveal that the increase in macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed higher sensitivity of import prices to exchange rate movements. For instance, the rate of pass-through in Greece is equal to 0.66% when the yield differential is below 2.13%, but beyond this threshold level, the sensitivity of import prices becomes higher and reaches full ERPT. Our findings raise the serious question of whether the exchange rate could be an effective tool to boost the trade balance and prevent deflationary threats when financial crisis hits.

Revisiting the role of inflation environment in exchange rate pass-through: A panel threshold approach

This paper sheds new light on the role of inflation regimes in explaining the extent of exchange rate pass-through (ERPT) into import prices. In order to classify the 24 developing countries included in his study, Barhoumi (2006) chose an arbitrary threshold of 10% to split the sample between high and low inflation regimes. For more accuracy, our study uses a panel threshold framework where a grid search is used to select the appropriate threshold value. In a larger panel-data set including 63 countries over the 1992–2012 period, we find that there are two threshold points identified by the data, allowing us to split our sample into three inflation regimes. When estimating the ERPT for each group of countries, we point out a strong regime-dependence of pass-through to inflation environment, that is, the class of countries with higher inflation rates experiences the higher degree of ERPT.

Exchange rate pass-through to import prices in the Euro-area: A multi-currency investigation

Using a new database of actual import price data rather than unit value indices, we analyze the impact of currency-invoicing decision of exporting firms on the extent of exchange rate pass-through (ERPT) for several Euro-area countries during the period of June 2005 to July 2013. Mainly, we use a multi-currency approach to distinguish between invoicing strategies across the most important currencies for Euro-area imports and make a distinction between bilateral and multilateral (or effective) ERPT. First, we show that the effective ERPT is primarily driven by the US Dollar bilateral ERPT. Second, in contrast to several papers in the empirical literature which argue that ERPT is low and incomplete, we find that short run effective ERPT is incomplete, while long run effective ERPT is complete. Third, estimating time-varying ERPT, we uncover that the 2008 global crisis triggered a temporary increase in the effective ERPT and find no evidence of declining value of the ERPT.

Exchange rate pass-through: A generalization

The extent of exchange rate pass-through has been playing an increasingly pivotal role in the transmission of exchange rate shocks and adequate policy responses. We develop a model of exchange rate pass-through that allows the stochastic process of exchange rate to include the lagged values of the velocity of money. We show that the likelihood and extent of pass-through is sensitive to the lagged response.

Declines in Exchange Rate Pass-through to Export Prices in Korea

This paper investigates changes in the extent of exchange rate pass-through to export price in Korea. First, empirical results show that export prices have become less responsive to the exchange rate since the financial crisis in 1997. The decline of exchange rate pass-through to export prices suggests that Korean exporters are more likely to use profit margins to absorb part of the impact of exchange rate changes, consistent with pricing to market phenomenon. Second, this paper finds asymmetries in the response of export prices to exchange rate changes. In the post-crisis period. appreciations are more likely to be offset by markup adjustment than depreciations. Third, this paper documents that a significant portion of the decline of exchange rate pass-through is a result of both increased volatility of exchange rate and increased competition with China in the world market.

On the Channels of Foreign Direct Investment to Exchange Rate Pass-Through Strategies: An Analysis from Spatial Panel Data

Exchange Rate Pass-Through and Pricing-to-Market behavior is an important consideration in International Economics and Industrial Organization Theory. The goal of this paper is to provide both theoretically and empirically justified definition of Foreign Direct Investment (FDI) effect on extent of exchange rate pass-through. In the theoretical part, the Cournot fashion of international duopoly market is constructed to explain reaction functions between a local firm in a host country and a foreign multinational. Preliminary results of theoretical framework indicate that FDI will have an affect on the lowering degree of exchange rate pass-through and generates higher degree of Pricing-to-Market behavior. We estimate the model of exporters with multi-destination by observing samples of five U.S. exporting industries based on 4-digit SIC index. We approach the ideas of spatial econometrics with belief that disturbance terms are possible to spatially correlate across countries, based on geographic proximity measurement. The estimated results show that all types of foreign direct investments have an affect on the lowering degree of pass-through while Joint Venture generates the most significant prediction and Division generates the least. The effect of having the first foreign operation in local markets is not significant to the degree of pass-through.

What is the extent of exchange rate pass-through in Singapore? Has it changed over time?

This paper estimates the extent and evolution of exchange rate pass-through into import prices in Singapore for the period 1980 to 2005. Our results indicate that exchange rate pass-through into Singapore's import prices is 25% in the short-run and slightly higher at 29% for the long-run. There is evidence to suggest that the pass-through elasticity has trended downwards from 0.4 in 1983 to around 0.3 by 1987, after which it has remained fairly stable. The paper also examines the macroeconomic determinants of Singapore's exchange rate pass-through.

Exchange rate pass-through and relative prices: An industry-level empirical investigation

In this paper we explore the extent of exchange rate pass-through for the USA, UK and Japan using a post-Bretton Woods industry-level dataset. We investigate how different channels of exchange rate pass-through affect domestic and import prices. Our analysis is suggestive of two channels of transmission and we find considerable variation in the extent of pass-through across industries and countries.

Financial integration and the wealth effect of exchange rate fluctuations

Recent years have witnessed a large increase in international financial integration in the form of largely offsetting cross-holdings across countries. We assess how such financial leverage affects the international transmission of monetary shocks, and find that it leads to sizable welfare differentials that far exceed the impact due to nominal rigidities. We document the relevance of the exact nature of holdings, with bond holdings associated with larger effects than equity holdings. The impact of financial leverage on welfare is also sensitive to the extent of exchange rate pass-through and the substitutability between goods produced in different countries.

Macroeconomic Determinants of Exchange Rate Pass-Through in India

This paper examines the evolution of exchange rate pass-through (ERPT) into India's consumer price index (CPI) at the aggregate level over the period 1980Q1-2006Q4. It also investigates whether the extent of exchange rate pass-through is impacted by common macro fundamentals such as inflation and exchange rate volatility. Finally, the paper also tests for possible asymmetries of ERPT during periods of depreciation versus appreciation.

A Tale of Two Cities Revisited: Pass-through in Hong Kong & Singapore

This paper compares the extent of exchange rate pass-through at the aggregate level into CPI and import prices in Singapore and Hong Kong for the period 1980 to 2005. A priori one might expect that these two economies which have relatively small markets and are highly open with high degree of dependence on foreign goods for domestic consumption, will be faced with relatively high exchange rate pass-through. Results suggest that exchange rate pass-through in Hong Kong is higher than in Singapore. The paper further examines whether pass-through has changed over time in the two economies.

A note on exchange rate pass-through in CIS countries

We assess the extent and speed of exchange rate pass-through in the countries of Commonwealth of Independent States (CIS). We do this in the framework of vector autoregressive regressions, utilising impulse functions and variance decompositions with monthly data that starts in 1999 in order to avoid the periods of very high inflation and the Russian crisis. We find that exchange rate movements have a clear impact on price developments in the CIS countries. Speed of pass-through is also fairly high, in most cases the full effect is transmitted into domestic prices in less than 12 months. Unlike in many other emerging market countries, an additional effect from US prices on to domestic prices is not significant. The extent of exchange rate pass-through is usually much higher than in our benchmark group of emerging market countries. Variance decomposition shows that the relative share of exchange rates in explaining changes in domestic prices is higher in the CIS countries than in the benchmark group. Our results indicate that policy-makers in the CIS countries need to pay more attention to exchange rate movements than in many other emerging market countries.

Exchange rate pass-through in the U.S. automobile market: A cointegration approach

This study analyzes exchange rate pass-through in the presence of monopolistic competition in the U.S. automobile market. Using cointegration techniques, we investigate how foreign competing firms' prices interact following an exchange rate-shock. The results generally indicate price interdependence (competition) among the rival firms. In one case where we did not find any price interdependence, the extent of exchange rate pass-through was higher. This validates the economic intuition that a low degree of price competition corresponds with a high degree of exchange rate pass-through.

A Note on Exchange Rate Pass-through in CIS Countries

We assess the extent and speed of exchange rate pass-through in the countries of the Commonwealth of Independent States (CIS). We do this in the framework of vector autoregressive regressions, utilising impulse functions and variance decompositions with monthly data that starts in 1999 in order to avoid periods of very high inflation and the Russian crisis. We find that exchange rate movements have a clear impact on price developments in the CIS countries. The speed of the pass-through is also fairly high: in most cases the full effect is transmitted into domestic prices in less than 12 months. Unlike in many other emerging market economies, an additional effect from US prices on to domestic prices is not significant. The extent of the exchange rate pass-through is usually much higher than in our benchmark group of emerging market countries. Variance decomposition shows that the relative share of exchange rates in explaining changes in domestic prices is higher in the CIS countries than in the benchmark group. Our results indicate that policy-makers in the CIS countries need to pay more attention to exchange rate movements than in many other emerging market countries.

Exchange Rate Pass-Through and International Pricing Strategy: A Conceptual Framework and Research Propositions

The extent to which exchange rate fluctuations affect international prices is called “exchange rate pass-through.” This paper develops a conceptual model in explaining how exchange rate fluctuations are channeled into international pricing strategy, and offers research propositions. Our model posits that the extent of exchange rate pass-through in international pricing is affected by the firm's pricing orientation, performance orientation, distribution policy, and brand equity, as well as by exchange rate uncertainty and competitive symmetry.

Price discrimination and markups in export markets

Imperfect competition in international markets is one of the key explanations for why prices of ‘similar’ goods might differ among destination countries. This paper develops an empirical model to examine the presence of price discrimination stemming from imperfect competition in the international market for a country's exports. The model is used to examine the export behavior of Taiwanese exporters of footwear. The generalized supply relation allows identification of deviations from competitive pricing in each export market. In addition, the model provides insights into the extent of exchange rate pass-through. Finally, the model is modified in order to estimate the effect of the voluntary export restraint imposed in the U.S. on footwear imports from Taiwan.