Incomplete Pass-through Research Articles

Pass-Through of Trade Costs to U.S. Import Prices

This paper measures the pass-through of trade costs into U.S. import prices by using actual data on duties/tariffs and freight-related costs. The key innovation is to decompose the indirect effects of trade costs (on prices) into the effects on markups, quality and productivity while measuring/interpreting the pass-through of trade costs into welfare. Robust to the consideration of variable versus constant markups, there is evidence for incomplete pass-through, mostly due to the negative indirect effects of trade costs on marginal costs, suggesting that lower trade costs are associated with imports that have higher marginal costs; markups are affected relatively less. When the effects of trade costs on marginal costs are further decomposed into their components, the positive contribution of quality dominates in all cases, followed by the negative effects of productivity, suggesting that lower trade costs are associated with higher-quality imports that have been produced with lower productivity.

Pass-through of trade costs to U.S. import prices

This paper measures the pass-through of trade costs into U.S. import prices by using actual data on duties/tariffs and freight-related costs. The key innovation is to decompose the indirect effects of trade costs (on prices) into the effects on markups, quality and productivity while measuring/interpreting the pass-through of trade costs into welfare. Robust to the consideration of variable versus constant markups, there is evidence for incomplete pass-through, mostly due to the negative indirect effects of trade costs on marginal costs, suggesting that lower trade costs are associated with imports that have higher marginal costs; markups are affected relatively less. When the effects of trade costs on marginal costs are further decomposed into their components, the positive contribution of quality dominates in all cases, followed by the negative effects of productivity, suggesting that lower trade costs are associated with higher-quality imports that have been produced with lower productivity.

Import Response to Exchange Rate Fluctuations: A Micro-Level Investigation

This paper presents theory and evidence on firms' import responses to exchange rate fluctuations using highly disaggregated data of Chinese imports from OECD countries. The paper first develops a heterogeneous-firm trade model and predicts firms' import responses at both the extensive and intensive margins: when domestic currency appreciates, more firms start importing and more products are added into the imported inputs bundle (extensive margin effect), and the import value by each firm also increases (intensive margin effect). The model also predicts that those import responses are more profound for firms in ordinary trade than for those in processing trade. Next, the paper empirically investigates firms' import responses to exchange rate fluctuations at extensive and intensive margins in both the short run and the long run, and all the model predictions are confirmed. The predicted pattern is more robust in the long run than in the short run. We also find variations among import responses under different exchange rate regimes (including a fixed exchange rate regime, an expected appreciation regime, and a confirmed appreciation regime). Finally, we investigate the exchange rate pass-through to import prices and find that incomplete pass-through has declined.

Exchange Rate Pass-through Effect and Monetary Policy in Mongolia: Small Open Economy DSGE Model

Abstract This study is carried out in a small open economy New Keynesian DSGE model proposed by Monacelli (2005) . As a result, firstly the exchange rate pass-through into import price and inflation is 0.69% and 0.49% respectively in short run. Secondly, the exchange rate acts as a shock absorber for domestic productivity and foreign demand shock. Thirdly , in case of incomplete pass-through the central bank of Mongolia is required to adjust the nominal interest rate more under the productivity shock. Therefore, considering incomplete pass-through is significant to improve the effectiveness of the monetary policy for the central bank of Mongolia.

Forward-Looking Exporters and Exchange Rate Pass-Through: A Micro-Level Investigation

This paper shows that the pricing behavior of exporting firms exhibits a “forward-looking” nature under sticky prices. It offers a channel by which the expectations of future exchange rates affect current prices. To seek the micro-level evidence, we adopt detailed product-level import data of the United States and firm-product-level export data of China combined with forward premiums to study the exchange rate pass-through. We find that not only current (and past) exchange rate fluctuations but also anticipated future exchange rate changes effectively pass through into current prices, suggesting a potentially important factor in help explaining incomplete exchange rate pass-through.

Jagged Cliffs and Stumbling Blocks: Interest Rate Pass-Through Fragmentation During the Euro Area Crisis

The financial crisis has been characterised by fragmentation in the transmission of monetary policy, reflected in high dispersion in the cost of bank finance for euro area firms. Using micro-level bank data across a number of euro area countries, we identify individual bank balance sheet characteristics that contributed to this fragmentation. Interest rate pass-through heterogeneity is estimated using an error correction framework, which captures banks' funding constraints and balance sheet structures. Results show incomplete pass-through of changes in money market rates targeted by the central bank to firms' lending rates, with increases in sovereign bond yields affecting the cost of finance for firms, particularly in stressed countries. Individual bank characteristics have an effect on pass-through during the crisis, even after controlling for changes in macroeconomic conditions. The effect is greatest when looking at characteristics that capture bank funding difficulties, suggesting that a recovery in banks' funding capacities is an important element in reducing fragmentation in the transmission of monetary policy. JEL Classification: E52, E58, G01, G20, E43

O pass-through da taxa de câmbio para índices de preços: análise empírica para o Brasil

O presente artigo objetiva analisar empiricamente a relação entre taxa de câmbio e preços no Brasil no período de 1999 a 2012. Adicionalmente apresenta-se uma revisão da literatura teórica e empírica destacando os canais de transmissão do câmbio para os índices de preços tanto no âmbito micro quanto macroeconômico. Para alcançar o objetivo proposto, utilizou-se o procedimento econométrico de séries temporais através do Vetor de Correção de Erros. Os resultados encontrados sugerem uma relação de longo prazo entre câmbio e os índices de preços domésticos em análise, embora seja possível constatar um grau depass-through incompleto. Observa-se também que o repasse é maior para o índice de preços (IGPDI) com maior componente de preços por atacado.

Exchange Rate Pass-Through Effect: An Analysis of Different Trade Methods with Computer Technology

This paper investigates the degree of the sensitivity of different types of trade to RMB exchange rate pass-through (ERRT) on the basis of the 201 sample data collected from Oct. 1996 to June, 2013. As a result, the conclusion is drew that the incomplete pass-through effect of RMB exchange rate performs relatively prominent in types of import and export trade and presents obvious type difference. Broadly speaking, the effect of exchange pass-through on the general import trade type is greater than that on the export. It is also indicated through the analysis that the appreciation of exchange rate can not change radically the phenomenon of trade imbalance. The type of import and export trade in special areas is relatively better concerning the exchange rate pass-through, which can be able to take on the pilot responsibility for the reform of exchange rate in China.

Does Privatized Health Insurance Benefit Patients or Producers? Evidence from Medicare Advantage

A central question in the debate over privatized Medicare is whether increased government payments to private Medicare Advantage (MA) plans generate lower premiums for consumers or higher profits for producers. Using difference‑in‑differences variation brought about by a sharp legislative change, we find that MA insurers pass through 45 percent of increased payments in lower premiums and an additional 9 percent in more generous benefits. We show that advantageous selection into MA cannot explain this incomplete pass‑through. Instead, our evidence suggests that market power is important, with premium pass‑through rates of 13 percent in the least competitive markets and 74 percent in the most competitive.

Exchange rate pass-through to domestic prices in Namibia: SVAR evidence

This article investigates exchange rate pass-through to domestic prices in Namibia. The study covers the period of 1993:Q1 – 2011:Q4, and employed the impulse response functions and variance decompositions obtained from a structural vector autoregressive model. The results from the impulse response functions show that there is a high and long-lasting effect from changes in exchange rates to inflation in Namibia, or high exchange rate pass-through into domestic inflation. The results from the forecast error variance decompositions also reflect that changes in the price level evolve endogenously with changes in the exchange rate. The results are in agreement with the findings of the impulse response functions regarding the significant effect of the exchange rate variable on domestic prices (inflation). The results confirm an incomplete pass-through, indicating that the purchasing power parity theory does not hold, with regard to the price level, in the context of Namibia.

Monetary shocks, exchange rates, and the extensive margin of exports

This paper develops a two-country Dynamic General Equilibrium model to assess the relationship between the real exchange rate and the extensive margin of exports. Exchange rate pass-through to consumer prices governs the relative strength of a demand channel onto the exporting decision of a firm. With incomplete pass-through, a favorable movement in the real exchange rate generates increased export participation and an expansion in the extensive margin of exports. This result is consistent with firm-level studies, and contributes to an ongoing empirical debate as to the importance of changes in export participation over the business cycle.

Profiting from Innovation: Firm Level Evidence on Markups

While innovation is argued to create value, private incentives of …rms to innovate are driven by what part of the value created …rms can appropriate. In this paper we explore the relation between innovation and the markups a …rm is able to extract after innovating. We estimate …rm-speci…c price-cost margins from production data and …nd that both product and process innovations are positively related to these markups. Product innovations increase markups on average by 5.1% points by shifting out demand and increasing prices. Process innovation increases markups by 3.8% points due to incomplete pass-through of the cost reductions associated with process innovation. The ability of the …rm to appropriate returns from innova

English

  This paper examines the degree of pass-through and the adjustment speed of the bank rate and partB rate  in response to changes in the repo and treasury bill rates in South Africa for the period 1998M4 to 2011M1. The repo rate is the policy rate while the treasury bill rate (TBR) represents money market rates.  We employ the ARDL and FMLS estimators to test for co-integration over the whole sample period 1998M4 to 2011M1. From the ARDL model, long-run repo rates pass-through to bank rates range from 0.83 to 1.21. Estimates higher than unity indicate the overshooting of bank rates. Long-run TBR pass-through to participation mortgage bond rates lie between 1.00 and 1.29. A striking result is that both repo rates and TBR show overshooting in bankrates and partB rates. This phenomenon is akin to overshooting in exchange rates due to price increases. Our repo results to bankrates are similar to Aziakpono et al. (2007) and De Angelis et al. (2005). To the author’s knowledge, there are no studies that have examined repo and TBR pass-through to participation mortgage bond rates in South Africa.     Key words: Interest rate pass-through, monetary policy, incomplete pass-through, ARDL, FMLS, bankrates, partB rates, overshooting, TBR, repo rates.

The Relation between Banks' Funding Costs, Retail Rates and Loan Volumes: An Analysis of Norwegian Bank Micro Data

We use a dynamic factor model and a detailed panel data set for six Norwegian bank groups to analyze i) how funding costs affect retail loan rates and ii) how retail rate differences between banks affect market shares. The data set consists of quarterly data for 2002Q1-2011Q3 and include information on loan volumes and retail (interest) rates for loans to firms and households. The cost of market funding is represented in our analysis by the three-month money market rate and a proxy for market risk - the credit spread on unsecured senior bonds issued by Norwegian banks. Our estimates clearly suggest incomplete pass-through: a 10 basis points increase in the market rate leads to an approximately 8 basis points increase in retail loan rates. We also find that credit demand from households is more elastic with regard to the loan rate than demand from businesses.

A DSGE-VAR model for forecasting key South African macroeconomic variables

The paper develops a Small Open Economy New Keynesian DSGE-VAR (SOENKDSGE-VAR) model of the South African economy, characterised by incomplete pass-through of exchange rate changes, external habit formation, partial indexation of domestic prices and wages to past inflation, and staggered price and wage setting. The model is estimated using Bayesian techniques on data from the period 1980Q1 to 2003Q2, and then used to forecast output, inflation and nominal short-term interest rate for one-to eight-quarters-ahead over an out-of sample horizon of 2003Q3 to 2010Q4. When the forecast performance of the SOENKDSGE-VAR model is compared with an independently estimated DSGE model, the classical VAR and six alternative BVAR models, we find that, barring the BVAR model based on the SSVS prior on both VAR coefficients and the error covariance, the SOENKDSGE-VAR model is found to perform competitively, if not, better than all the other VAR models.

Incomplete interest rate pass-through under credit and labor market frictions

By introducing search and matching frictions in both the labor and the credit markets into a cash in advance New Keynesian DSGE model, we provide a novel explanation of the incomplete pass-through from policy rates to loan rates. We show that this phenomenon is ineradicable if banks possess some power in the bargaining over the loan rate of interest, if the cost of posting job vacancies is positive and if firms and banks sustain costs when searching for lines of credit and when posting credit vacancies, respectively. We also show that the presence of credit market frictions moderates the reactions of employment and wages to a monetary shock. Finally, we confirm the finding that pass-through incompleteness has limited short-term impacts on the transmission of monetary policy shocks to output and inflation.

Exchange Rate Pass-Through and Unemployment Dynamics

This paper develops a small open economy model with nominal rigidities and search-matching frictions to study the implications of incomplete exchange rate pass-through for unemployment dynamics. The model shows that incomplete exchange rate pass-through to the prices of imported goods has a larger impact on unemployment movements than does incomplete pass-through to the prices of imported inputs. Also, the effect of delayed exchange rate pass-through on unemployment dynamics depends critically on the nature of the shock that disturbs the economy.

Exchange rate pass-through and fiscal multipliers

This paper develops a small open economy model with nominal rigidities and search-matching frictions to study the implications of the degree of exchange rate pass-through for fiscal multipliers. I allow for delayed pass-through to both imported consumption goods prices and imported intermediate goods prices. The result shows that incomplete exchange rate pass-through to imported goods prices dampens the fiscal impact on output and unemployment. However, incomplete pass-through to imported input prices has little effect on the output and unemployment multipliers.

Lending Rate Pass-Through, Sectoral Analysis, Asymmetric Stickiness, and Bank Heterogeneity in a Small Transition Economy

We investigate the lending rate pass-through in a small transition economy. We use disaggregated high-frequency data on commercial banks in Azerbaijan and employ an ARDL model to measure the impact of policy rate innovations on the banks’ lending rates. We perform a sectoral analysis by comparing the pass-through and short-term adjustment estimates for loans directed at different segments of the economy. Then, we decompose the baseline model to allow for asymmetric stickiness. In the end, we look at the determinants of interest rate pass-through by measuring bank heterogeneity with a vast array of bank characteristics.Results show that a considerably incomplete pass-through is present in the case of all banks, the finding consistent with a non-competitive banking sector. The average pass-through effect is 25% and the average period of adjustment is 5 months. Sectoral analysis reveals that pass-through is the strongest for industrial loans and the lowest for consumer loans, suggesting that banks exert more monopolistic pricing powers on consumers while hedging against risks associated with industrial lending. An extension of the model with asymmetric adjustment shows that negative policy rate innovations trigger a quicker adjustment to the long-run equilibrium than do positive innovations, supporting the argument of upward lending rate stickiness. Our analysis of bank heterogeneity produces a significant negative coefficient for the impact of liquidity on both the interest rate pass-through and the speed of adjustment, implying that pass-through deteriorates as bank liquidity increases. This confirms the detrimental impact of structural excess liquidity on monetary policy efficacy. Overall, our results are very consistent for a typical small Central-Asian economy in transition with a quasi-fixed exchange rate regime.

Trade liberalisation and exchange rate pass-through: the case of textiles and wearing apparels

Studies on the relationship between exchange rates and traded goods prices typically find evidence of incomplete pass-through, usually explained by pricing-to-market behaviour. Although economic theory predicts that incomplete pass-through may also be linked to the presence of non-tariff barriers to trade, variables reflecting such a link is rarely included in empirical models. In this paper, we estimate a pricing-to-market model for Norwegian import prices on textiles and wearing apparels, controlling for non-tariff barriers to trade and shift in imports from high- to low-cost countries. We apply the cointegrated VAR approach and develop measures of foreign prices based on superlative price indices (including the Tornqvist and Fischer price indices) and a data calibration method necessary to approximate relative price levels across countries. Our measures of foreign prices thereby account for inflationary differences and varying import shares and price level differences (known as the China effect) among trading partners. We show that these measures of foreign prices, unlike standard measures used in the pricing-to-market literature, are likely to produce unbiased estimates of pass-through. Once the China effect is controlled for, we find little evidence that pass-through has changed alongside trade liberalisation.