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Exchange rate pass-through into U.K. import prices: evidence from disaggregated data

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  • Haroon Mumtaz
  • Özlem Oomen
  • Jian Wang

Abstract

In this paper we estimate the rate of exchange rate pass-through (ERPT) into U.K. import prices using disaggregated data at the SITC-2 and SITC-3 digit levels. We show that the ERPT varies at the disaggregate level. Because of this heterogeneity at the disaggregate level, the estimate of the ERPT using aggregate data is found substantially upward-biased in our U.K. data. The upward bias exaggerates the impact of exchange rate movements on the competitiveness of imported goods relative to domestically produced goods. Further, we investigate the source of the heterogeneity of the ERPT at the disaggregate level. The industry-specific inflation rate is found significant in explaining this heterogeneity. Finally, we find a significant reduction in estimated ERPT since 1995. Unlike some previous studies, our results suggest that the decrease of the ERPT is correlated with the increased economic stability in the U.K. during the last decade.

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Bibliographic Info

Article provided by Federal Reserve Bank of Dallas in its journal Staff Papers.

Volume (Year): (2011)
Issue (Month): June ()
Pages:

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Handle: RePEc:fip:feddst:y:2011:i:june:n:14

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Keywords: International finance ; International trade ; Economic stabilization ; Imports - Prices ; Industries;

References

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  1. repec:ebl:ecbull:v:6:y:2003:i:8:p:1-13 is not listed on IDEAS
  2. Michael B. Devereux & Charles Engel, 2003. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange-Rate Flexibility," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 765-783.
  3. Devereux, Michael B & Yetman, James, 2003. " Predetermined Prices and the Persistent Effects of Money on Output," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 729-41, October.
  4. Eiji Fuji & Jeannine Bailliu, 2004. "Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation," Computing in Economics and Finance 2004 135, Society for Computational Economics.
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  10. Stefano Chiarlone, 2000. "Evidence of Product Differentiation and Relative Quality in Italian Trade," KITeS Working Papers 114, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Jul 2000.
  11. Jeannine Bailliu & Hafedh Bouakez, 2004. "Exchange Rate Pass-Through in Industrialized Countries," Bank of Canada Review, Bank of Canada, vol. 2004(Spring), pages 19-28.
  12. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
  13. Toshitaka Sekine, 2006. "Time-varying exchange rate pass-through: experiences of some industrial countries," BIS Working Papers 202, Bank for International Settlements.
  14. Jiawen Yang, 1997. "Exchange Rate Pass-Through In U.S. Manufacturing Industries," The Review of Economics and Statistics, MIT Press, vol. 79(1), pages 95-104, February.
  15. Gita Gopinath & Oleg Itskhoki & Roberto Rigobon, 2010. "Currency Choice and Exchange Rate Pass-Through," American Economic Review, American Economic Association, vol. 100(1), pages 304-36, March.
  16. Donald Robertson & James Symons, 1991. "Some Strange Properties of Panel Data Estimators," CEP Discussion Papers dp0044, Centre for Economic Performance, LSE.
  17. Dalia Hakura & Ehsan U. Choudhri, 2001. "Exchange Rate Pass-Through to Domestic Prices," IMF Working Papers 01/194, International Monetary Fund.
  18. Haroon Mumtaz & Jean Imbs & Morten O. Ravn & Helene Rey, 2003. "PPP Strikes Back," IMF Working Papers 03/68, International Monetary Fund.
  19. Otani, Akira & Shiratsuka, Shigenori & Shirota, Toyoichiro, 2006. "Revisiting the Decline in the Exchange Rate Pass-Through: Further Evidence from Japan's Import Prices," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 24(1), pages 61-75, March.
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