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Buy foreign while you can: the cheap dollar and exchange rate pass-through

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  • Eduardo J.J. Ganapolsky
  • Diego Vilan

Abstract

Despite the dollar’s real depreciation in the past few years, the U.S. trade deficit has continued to increase, with the level of imports reaching record highs. Why has the cheaper dollar not made imports more expensive and exports more attractive and, in turn, reduced the trade deficit? ; This article presents evidence on the degree of exchange rate pass-through (ERPT)—the extent to which U.S. domestic import prices have moved in response to changes in the exchange rate—from December 1993 through December 2004. Using monthly data, the authors first decompose domestic import prices to their foreign price and exchange rate components and then test for the presence of ERPT in selected import categories. ; According to their analysis, ERPT elasticity has trended downward for the main import categories during the ten-year period. But at the more disaggregated levels, ERPT showed an upward trend for some items during the last months of 2004, especially for capital and consumer goods. ; The authors interpret this shift as a sign that some foreign firms may have stopped absorbing exchange rate depreciations as the falling dollar has shaved away their profit margins. To be able to survive, some foreign exporters might begin passing through exchange rate depreciations to domestic import prices, the authors conclude.

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Bibliographic Info

Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (2005)
Issue (Month): Q 3 ()
Pages: 15-36

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Handle: RePEc:fip:fedaer:y:2005:i:q3:p:15-36:n:v.90no.3

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Keywords: Foreign exchange rates ; Imports - Prices;

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  1. Ariel T. Burstein & Joao C. Neves & Sergio Rebelo, 2000. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilizations," RCER Working Papers 473, University of Rochester - Center for Economic Research (RCER).
  2. Richard Baldwin & Paul R. Krugman, 1986. "Persistent Trade Effects of Large Exchage Rate Shocks," NBER Working Papers 2017, National Bureau of Economic Research, Inc.
  3. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?," NBER Working Papers 8934, National Bureau of Economic Research, Inc.
  4. Mario Marazzi & Nathan Sheets & Robert J. Vigfusson & Jon Faust & Joseph Gagnon & Jaime Marquez & Robert F. Martin & Trevor Reeve & John Rogers, 2005. "Exchange rate pass-through to U.S. import prices: some new evidence," International Finance Discussion Papers 833, Board of Governors of the Federal Reserve System (U.S.).
  5. Feenstra, Robert C., 1989. "Symmetric pass-through of tariffs and exchange rates under imperfect competition: An empirical test," Journal of International Economics, Elsevier, vol. 27(1-2), pages 25-45, August.
  6. Swamy, P. A. V. B. & Thurman, Stephan S., 1994. "Exchange rate episodes and the pass-through of exchange rates to import prices," Journal of Policy Modeling, Elsevier, vol. 16(6), pages 609-623, December.
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Cited by:
  1. Reginaldo P. Nogueira Jnr, 2006. "Inflation Targeting and the Role of Exchange Rate Pass-through," Studies in Economics 0602, Department of Economics, University of Kent.

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