Rate Pass-through Research Articles

Inertia and Pass-Through in Retail Deposit Markets

This paper investigates heterogeneous pass-through of monetary policy rates to variable-rate savings accounts using monthly account-level panel data from a Dutch comparison website. I find incomplete and delayed pass-through that varies widely across banks but even account products offered by the same bank. Bank-specific factors explain less than half of the variation in pass-through rates. Within banks, internet-managed and newer accounts capturing market segments with more flexible consumers exhibit substantially higher pass-through than regular and older accounts. This suggests an important role of inertia for incomplete monetary transmission.

Russian Industrial Sector in May 2019: Out of Stagnation

In May, according to industrial enterprises estimates, output, and employment held steady. Moreover, industry indicated its readiness to cut prices thus showing the termination of the VAT new rate pass-through into producers’ prices. Business forecasts retain high level of optimism maintained by the growth of finished goods inventories.

Reducing Obesity by Taxing Soft Drinks: Tax Salience and Firms’ Strategic Responses

In the fight against obesity, governments have pursued various policies to increase soda prices in the hope of discouraging consumption. Previous studies examining the efficacy of taxing sodas have generalized sales taxes to other taxes and assumed that imposing a tax is as salient as imposing a direct price hike. In this research, the authors recognize that most consumers do not pay much attention to how taxes differ in application. Thus, the authors disassociate the effects of sales taxes from the effects of direct price increases on soda demand, estimate pass-through rates of excise taxes in the soda market, and compare the efficacy of the two types of tax at three tax levels. They find that, for all three tax levels, imposing an excise tax on sodas drives much steeper declines in overall demand than a sales tax does. The findings suggest that failing to distinguish between tax types leads to a biased estimation of the effect of taxes on soda consumption. This research provides important implications to help policy makers adopt the most applicable tax instrument to battle obesity.

Are Alcohol Excise Taxes Overshifted to Prices? Systematic Review and Meta-Analysis of Empirical Evidence From 29 Studies

This paper conducts the first comprehensive review and meta-analysis for estimates of alcohol tax pass-through rates. The review examines data coverage by country; econometric models; and results for under- or overshifting by beverage. Several primary studies indicate substantial over-shifting of alcohol taxes. Median rates also suggest taxes are overshifted. Precision weighted-averages calculated for two samples show beer taxes are overshifted and wine-spirits taxes are fully shifted. Meta-regressions corrected for publication bias indicate, however, that full-shifting of alcohol taxes cannot be rejected for any beverage. Results are useful for alcohol tax policy and future research on tax incidence.

PASS-THROUGH RATE STUDY FOR HONG KONG BANKING INDUSTRY AND ITS APPLICATION TO NONMATURITY DEPOSITS INTEREST RATE RISK MANAGEMENT

Basel Committee on Banking Supervision published Standards on Interest Rate Risk in Banking Book in April 2016. Apart from others, it proposed a standardized framework under which banks should identify core and noncore deposits within their stable nonmaturity deposits (NMD) and determine appropriate cash flow slotting for the NMD. This paper proposed a unique solution to slot Core NMD into repricing time buckets to address Basel requirements on NMD. The proposed solution was based on pass-through rate model under ECM (error correction model) framework. The solution itself showed interesting mathematical property to form a generalized Fibonacci sequence with converged partial sum. What is more, this paper proposed a model-neutral back testing scheme to make objective comparison of performance across different NMD repricing behavior models. The contents of this paper are expected to be useful for practitioners due to lack of quantitative modeling and model validation methodologies on this topic in the industry while, at the same time, to motivate academic discussion on the best practice and further enhancement of the modeling approach for the industry.

Pass-Through with Endogenous Quality: An Empirical Study of Per-Passenger and Per-Flight Airport Charges

This study empirically investigates the pass-through rates and incidence in the airline industry to understand how airport charges affect airfares, service quality (flight frequency), and welfare. It estimates a structural model endogenizing airfares and flight frequency by using data on Japanese domestic routes and conducts simulation analyses. It is found that while per-flight charges hardly affect airfares, an increase in per-passenger charges significantly raises airfares with the average pass-through rate of 97.5 percent. The pass-through rates are overestimated when flight frequency is treated as exogenous. Both types of charges decrease flight frequency. In addition, on nearly 80 percent of the routes in the sample, while per-passenger charges are superior to per-flight charges from the viewpoint of airline profits, the order is reversed from the viewpoints of the passenger and social surpluses.

China’s impact on pass-through to US import prices

PurposeThis paper aims to analyze the marked decline in exchange rate pass-through to US import prices in the early 2000s focusing on the increased role of China as a trade partner. In particular, the research focuses on the impact of an exporter with a fixed exchange rate having large market shares of a particular importing country.Design/methodology/approachThe study uses highly disaggregated US import data and rolling regressions to calculate quarterly pass-through estimates for specific goods from every exporter. This leads to a total of over 1.7 million pass-through coefficients. The second stage compares these pass-through coefficients with China’s share of US import market for that particular good and time.FindingsThe paper shows that as China’s market share for specific goods grows, pass-through rates of imports from other countries falls. Pass-through rates remain relatively stable for goods that China does not export to the USA or goods for which China’s share of US imports stays constant. This relationship is stronger when the dollar decreases in value, further suggesting that pressure from China forces competitors to maintain stable prices.Originality/valueThis paper is unique in its use of highly disaggregated data on US imports. While many analyses of exchange rate pass-through focus on overall levels or general goods, this work uses import data at the 10-digit HTS code level. Therefore, the findings are more detailed in showing how China’s increased presence in the US market influences prices of imports from other countries.

Attitudes Toward Risk and Cost Pass-Through Under Uncertainty

This paper takes into account the difference in risk-aversion of producers to explain their degree of cost pass-through. Each producer can be either risk-neutral or risk-averse, characterized by a CARA utility function. We use our model to explain the surcharge formula in the stainless steel industry, in which American and European producers adopt 100% pass-through but Asian producers commit on zero pass-through. We find that the maximal pass-through differentiation structure arises if one supplier is risk-neutral (e.g., a Chinese state-owned enterprise) but the other is risk-averse (e.g., a domestic private enterprise). Contrarily, if both suppliers are similarly risk-averse (e.g., American vs. European producers), then the pass-through rates stay in the range of 40%-60% at market equilibrium. The presence of a risk-neutral foreign producer is an essential driver for a domestic risk-averse producer to push his pass-through rate toward an extremely high level. We also find that tariff is inefficient to promote the competitiveness of domestic producer.

Exchange Rate vs Foreign Price Passthrough Gap: Evidence From the European Gasoline Market

We show that European retail gasoline prices respond slower to changes in the dollar exchange rate than to changes in the international spot price of wholesale gasoline, which is quoted in dollars. This differential passthrough is not specific to the Euro, and is observed both for Euro-member states and also for those using national currencies. We examine the possibility that this pattern is driven by differences in either the variability and or persistence of exchange rates changes relative to those of the dollar price of gasoline, but find minimal supporting evidence for either. Refinery supply contracts treat changes in the dollar price and the exchange rate symmetrically, and are thus also an unlikely explanation. Other possibilities, such pricing to the market or pricing based on the country of origin are precluded by the nature of the product. There is evidence, however, that exchange rate fluctuations are more strongly correlated with country-specific economic conditions, which reduces the ability of firms to pass-through price increases and lessens their incentive to pass-through price decreases. Moreover, consumers likely draw a more direct link between the crude oil and retail gasoline prices, affecting their price expectations and search intensity, and optimal passthrough.

Free allocation rules in the EU emissions trading system: what does the empirical literature show?

ABSTRACTThis paper analyses the rules for free allocation in the EU Emissions Trading System (EU ETS). The analysis draws on the empirical evidence emerging from two literature strands. One group of studies sheds light on the following questions: how efficient are free allocation rules in minimizing the risk of carbon leakage? Have they become more efficient over the trading periods? What are the technical limits to making them more efficient? Further: is firm behaviour affected by allowance allocation? Did specific provisions induce strategic behaviour with unintended effects? Studies from the second group estimate sectoral pass-through rates for the costs imposed by the EU ETS. Taking cost pass-through into account is necessary for properly targeting free allocation. The difficulty of accurately quantifying sectoral differences in cost pass-through ability, especially in manufacturing sectors (due to limited data availability and market heterogeneity), is the main hindrance to achieving further efficiency in allowance allocation. The new rules defined in the reform for Phase IV (2021–2030) nevertheless make some progress in this direction.Key policy insightsThe difficulty of accurately quantifying sectoral differences in cost pass-through ability is the main hindrance to efficient free allocation in minimizing carbon leakage risk.In Phase IV (2021–2030), carbon leakage risk will be assessed more accurately thanks to: a) carbon intensity and trade intensity considered together through a combined indicator; b) possible use of more disaggregated data, and c) possible consideration of complementary qualitative assessments of abatement potential, market characteristics and profit margins.It is expected that benchmarked allocation introduced in Phase III (2013–2020) has induced additional emission abatement, but there is still a lack of empirical evidence.

Sweetened Beverages Excise Tax Passthrough Rates: A Case Study in Philadelphia

ABSTRACTA 1.5 cent per ounce excise tax was implemented on all sweetened beverages (SBs) in Philadelphia County on January 1, 2017 at the distributor level. As the tax is on the distributor, retailers must determine the passthrough rate of this tax to the shelf price for SBs as well as determine the prices for SB substitutes. This paper investigates the pricing of SBs and their substitutes at retailers both inside and outside of Philadelphia County. Results suggest a 100% excise tax passthrough rate on SBs with almost no price change on substitute products.

The Impact of the Philadelphia Beverage Tax on Prices and Product Availability

In recent years, numerous cities in the U.S. have enacted taxes on beverages to promote health and raise revenue. This paper examines the impact of Philadelphia’s beverage tax, enacted in 2017, on the prices and availability of taxed beverages and untaxed beverages that may be substitutes for consumers. Using original data we collected in late 2016 and again one year later, we estimate a difference-in-differences regression of the change over time in beverage prices and product availability in stores in Philadelphia relative to stores in nearby counties. We find that, on average, distributors and retailers fully pass the tax through to consumers, but the there is heterogeneity in the pass-through rate among stores. Pass-through is greater among stores in higher-poverty neighborhoods, stores located farther from untaxed stores outside Philadelphia, stores that are independent as opposed to part of national chains, and for individual servings than for larger sizes. We also find a reduction in the availability of taxed beverages and an increase in the availability of untaxed beverages, particularly bottled water, in Philadelphia stores.

Input Price Discrimination by Resale Market

This paper analyzes supply tariffs that discriminate between resale in different markets. In a setting with competing retailers that operate in multiple (independent or interdependent) markets, we show that, all else equal, a monopolist supplier wants to discriminate against resale in the market with the higher aggregate cross-seller diversion ratio. We find that discrimination can improve allocative efficiency and present sufficient conditions, involving the pass-through rates and the inverse market demand curvatures in the different markets, under which discrimination has positive effects on output and welfare. Our insights are relevant for the policy treatment of vertical restraints on online sales.

Carbon pricing and electricity markets — The case of the Australian Clean Energy Bill

We examine the impact of the Clean Energy Bill on the price behavior of electricity futures contracts in the Australian National Electricity Market. First, we compute ex-ante forward risk premiums in the pre-tax period (until June 2012), then derive market-implied expectations about additional costs of the Carbon Pricing Mechanism (CPM) on generators as well as pass-through rates during the carbon tax (July 2012–June 2014) and post-tax (after July 2014) periods. Our results suggest that the observed carbon premiums became increasingly higher, once the carbon tax had been proposed and subsequently legislated in 2011. During periods where market participants could be relatively certain that the tax would be effective, we find expected carbon pass-through rates between 67% and 150%, which seem to be inversely related to emission intensities in the regional markets. Our results are also a clear indication of strong policy uncertainty with regards to the CPM and suggest that in the future a stable and long-term policy framework would be required for a carbon pricing mechanism to have its full effect.

Reducing Obesity by Taxing Soft Drinks: Tax Salience and Firms' Strategic Responses

Abstract In the fight against obesity governments have pursued various policies to increase soda prices in the hope of discouraging consumption. Previous studies examining the efficacy of taxing sodas have generalized sales taxes to other taxes and assumed that imposing a tax is as salient as imposing a direct price hike. In this research, the authors recognize that most consumers do not pay much attention to how taxes differ in application. As such, the authors disassociate effects of sales taxes on soda demand from direct price increases, estimate pass-through rates of excise taxes in the soda market, and compare the efficacy of the two taxes at three tax levels. They find that, for all three tax levels, imposing an excise tax on sodas drives much steeper declines in the overall demand than a sales tax does. The findings suggest that failing to distinguish between tax types leads to a biased estimation of tax effects on reducing soda consumption. This research provides important implications to help pol...

For-Profit Higher Education Responsiveness to Price Shocks: An Investigation of Changes in Post 9-11 GI Bill Allowed Maximum Tuitions

In 2010, Congress reauthorized the Post-9/11 GI Bill by changing reimbursement rates from widely-varying by-state maximums to a nationwide limit. This policy created exogenous variation in the changes in reimbursement rates in direction and magnitude for veterans at private universities. We leverage this variation to examine for-profit college responses to changes in reimbursement rates. We detect tuition responses only for for-profit colleges, where we estimate a one percent pass-through rate. This for- profit response is driven by colleges in states that saw decreased benefits, colleges with higher concentrations of veterans, and colleges whose pre-change tuition was above the state maximum but below the since-increased nationwide level; the last group has a pass-through rate of eight percent. This policy also caused declines in non-veteran populations showing a substitution towards veteran students.

Time and Money: Social Security Benefits and Intergenerational Transfers

I examine the relationship between Social Security benefits, a major component of income in older age, and intergenerational transfers of financial help and caregiving. I find that the net pass-through rate of Social Security benefits from parents to children is about 15 percent, including only monetary inter vivos transfers. Parents with higher Social Security benefits provide more hours of help to children in the form of grandchild care, even though children significantly withdraw caregiving to parents along this dimension. Taken together, these results are consistent with parental altruism and have strong implications for the distributional consequences of Social Security reform.

Time and Money: Social Security Benefits and Intergenerational Transfers

I examine the relationship between Social Security benefits, a major component of income in older age, and intergenerational transfers of financial help and care-giving. I find that the net pass-through rate of Social Security benefits from parents to children is about 15 percent, including only monetary inter vivos transfers. Parents with higher Social Security benefits provide more hours of help to children in the form of grandchild care, even though children significantly withdraw care-giving to parents along this dimension. Taken together, these results are consistent with parental altruism and have strong implications for the distributional consequences of Social Security reform.

Sticker Shocks: Using VAT Changes to Estimate Upper-Level Elasticities of Substitution

We estimate the upper-level elasticity of substitution between goods and services of a nested aggregate CES preference specification. We show how this elasticity can be derived from the long-run response of the relative price of a good to a change in its VAT rate. We estimate this elasticity using new data on changes in VAT rates across 74 goods and services for 25 European Union countries from 1996 through 2015. Depending on the level of aggregation, we find a VAT pass-through rate between 0.4 and 0.7. This implies an upper-level elasticity of 3, at the lowest level of aggregation with 74 categories, and 1 (Cobb–Douglas preferences) at a high level of aggregation that distinguishes 10 categories of goods and services.

Incentive pass-through for residential solar systems in California

This paper estimates the incentive pass-through rate for the two largest solar photovoltaic rebate programs in the U.S.: California Solar Initiative and its predecessor Emerging Renewables Program. We apply both a structural-modeling approach based on the conduct parameter and a reduced-form regression analysis using different fixed effects. Identification comes from rebate level stepwise changes within each of the three major electric utilities in California and different rebate levels across the utilities. The results from both approaches suggest an average pass-through rate of direct incentives of nearly 100%, though with minor regional differences among California counties. These results suggest a relatively competitive market and a smoothly operating subsidy program, at least from an incentive pass-through perspective.