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

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  • Andreas Benedictow
  • Pål Boug

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    Abstract

    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 Törnqvist 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. Copyright Springer-Verlag 2013

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    Bibliographic Info

    Article provided by Springer in its journal Empirical Economics.

    Volume (Year): 45 (2013)
    Issue (Month): 2 (October)
    Pages: 757-788

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    Handle: RePEc:spr:empeco:v:45:y:2013:i:2:p:757-788

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    Related research

    Keywords: Trade liberalisation; The China effect; Import prices; pricing-to-market; Exchange rate pass-through; Vector autoregressive models; C22; C32; C43; E31;

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    References

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    Cited by:
    1. Andreas Benedictow & Pål Boug, 2014. "Calculating the real return of the Norwegian Government Pension Fund Global by alternative measures of the deflator," Discussion Papers 775, Research Department of Statistics Norway.

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