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Natural Hedging of Exchange Rate Risk: The Role of Imported Input Prices

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  • Dario Fauceglia
  • Anirudh Shingal
  • Martin Wermelinger

Abstract

In this paper, we estimate ERPT into imported input prices and export prices using disaggregated quarterly trade data for Switzerland over 2004–2011. We find evidence for high pass-through rates into imported input prices. This demonstrates the effectiveness of natural hedging. On the export side, ERPT exhibits substantial sectoral heterogeneity and changes in imported input costs are not transmitted to foreign consumers in most cases. This suggests the use of cheaper imported inputs to offset adverse effects of currency appreciation on export profit margins.

Suggested Citation

  • Dario Fauceglia & Anirudh Shingal & Martin Wermelinger, 2014. "Natural Hedging of Exchange Rate Risk: The Role of Imported Input Prices," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 150(IV), pages 261-296, December.
    • Handle: RePEc:ses:arsjes:2014-iv-1
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    1. Auer, Raphael A. & Mehrotra, Aaron, 2014. "Trade linkages and the globalisation of inflation in Asia and the Pacific," Journal of International Money and Finance, Elsevier, vol. 49(PA), pages 129-151.
    2. Mary Amiti & Oleg Itskhoki & Jozef Konings, 2014. "Importers, Exporters, and Exchange Rate Disconnect," American Economic Review, American Economic Association, vol. 104(7), pages 1942-1978, July.
    3. A. Berthou & G. Horny & J-S. Mésonnier, 2018. "Dollar Funding and Firm-Level Exports," Working papers 666, Banque de France.
    4. JaeBin Ahn & Chang-Gui Park, 2014. "Imported-Inputs Channel of Exchange Rate Pass-Through: Evidence from Korean Firm-Level Pricing Survey," Working Papers 2014-11, Economic Research Institute, Bank of Korea.
    5. Berthou, Antoine & Horny, Guillaume & Mésonnier, Jean-Stéphane, 2022. "The real effects of invoicing exports in dollars," Journal of International Economics, Elsevier, vol. 135(C).
    6. Witada Anukoonwattaka, 2013. "International Production Sharing and Exchange Rates of Asian Countries," Studies in Trade and Investment 80, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
    7. Tscheke, Jan, 2016. "Operational Hedging of Exchange Rate Risks," Discussion Papers in Economics 30227, University of Munich, Department of Economics.
    8. Boris Kaiser & Michael Siegenthaler, 2016. "The Skill‐biased Effects of Exchange Rate Fluctuations," Economic Journal, Royal Economic Society, vol. 0(592), pages 756-780, May.
    9. Daniel Kaufmann & Tobias Renkin, 2019. "Export Prices, Markups, and Currency Choice after a Large Appreciation," IRENE Working Papers 19-07, IRENE Institute of Economic Research.
    10. Hyelin Choi & Hyo Sang Kim, 2020. "Exchange Rates and Firm Exports: The Role of Foreign Ownership and Foreign Subsidiaries," Asian Economic Papers, MIT Press, vol. 19(2), pages 103-118, Summer.
    11. Twinam, Tate, 2020. "Trade Shocks and Growth: The Impact of the Quartz Crisis in Switzerland," SocArXiv twscm, Center for Open Science.
    12. Dario Fauceglia, 2020. "Exchange rate fluctuations and quality composition of exports: Evidence from Swiss product‐level data," The World Economy, Wiley Blackwell, vol. 43(6), pages 1592-1618, June.
    13. Raphael Auer & Aaron Mehrotra, 2014. "Real globalisation and price spillovers in Asia and the Pacific," BIS Papers chapters, in: Bank for International Settlements (ed.), Globalisation, inflation and monetary policy in Asia and the Pacific, volume 77, pages 81-89, Bank for International Settlements.
    14. Casas, Camila, 2020. "Industry heterogeneity and exchange rate pass-through," Journal of International Money and Finance, Elsevier, vol. 106(C).
    15. Firanchuk, Alexander, 2018. "Imported Intermediate Goods and Incomplete Exchange Rate Pass-Through into Export Prices," EconStor Preprints 182400, ZBW - Leibniz Information Centre for Economics.
    16. Ahn, JaeBin & Park, Chang-Gui, 2014. "Exchange rate pass-through to domestic producer prices: Evidence from Korean firm-level pricing survey," Economics Letters, Elsevier, vol. 125(1), pages 138-142.
    17. Martínez-Zarzoso, Inmaculada & Johannsen, Florian, 2017. "Monetary uncertainty and trade in Eastern Europe and Central Asia: A firm-level analysis," International Business Review, Elsevier, vol. 26(3), pages 476-490.
    18. Peter H. Egger & Johannes Schwarzer & Anirudh Shingal, 2018. "Labour market effects of currency appreciation: The case of Switzerland," RSCAS Working Papers 2018/30, European University Institute.
    19. Dario Fauceglia & Andrea Lassmann & Anirudh Shingal & Martin Wermelinger, 2018. "Backward participation in global value chains and exchange rate driven adjustments of Swiss exports," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(3), pages 537-584, August.

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    More about this item

    Keywords

    exchange rates; exchange rate pass-through; international trade; prices;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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