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Non-linear adjustment of import prices in the European Union

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Author Info

  • Campa, Jose Manuel

    ()
    (IESE Business School)

  • Gonzalez Minguez, Jose M

    ()
    (Banco de Espana)

  • Sebastia Barriel, Maria

    ()
    (Bank of England)

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    Abstract

    This paper focuses on the non-linear adjustment of import prices in national currency to shocks in exchange rates and foreign prices measured in the exporters' currency of products originating outside the euro area and imported into European Union countries (EU-15). The paper looks at three different types of non-linearities: (a) non-proportional adjustment (the size of the adjustment grows more than proportionally with the size of the misalignments), (b) asymmetric adjustment to cost-increasing and cost-decreasing shocks, and (c) the existence of thresholds in the size of misalignments below which no adjustment takes place. There is evidence of more than proportional adjustment towards long-run equilibrium in manufacturing industries. In these industries, the adjustment is faster the further away current import prices are from their implied long-run equilibrium. In contrast, a proportional linear adjustment cannot be rejected for some other imports (especially within agricultural and commodity imports). There is also strong evidence of asymmetry in the adjustment to long-run equilibrium. Deviations from long-run equilibrium due to exchange rate appreciations of the home currency result in a faster adjustment than those caused by a home currency depreciation. Finally, we also find that adjustment takes place in the industries in our sample only when deviations are above certain thresholds, and that these thresholds tend to be somewhat smaller for manufacturing industries than for commodities.

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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2008/WP347.pdf
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    Bibliographic Info

    Paper provided by Bank of England in its series Bank of England working papers with number 347.

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    Length: 36 pages
    Date of creation: Apr 2008
    Date of revision:
    Handle: RePEc:boe:boeewp:0347

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    Keywords: Exchange rate adjustment; European Union; monetary union.;

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    References

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    1. Ilan Goldfajn & Sérgio Ribeiro da Costa Werlang, 2000. "The Pass-through from Depreciation to Inflation: A Panel Study," Working Papers Series 5, Central Bank of Brazil, Research Department.
    2. José Manuel Campa & Linda S. Goldberg & José M. González-Mínguez, 2005. "Exchange-Rate Pass-Through to Import Prices in the Euro Area," NBER Working Papers 11632, National Bureau of Economic Research, Inc.
    3. Dick van Dijk & Timo Terasvirta & Philip Hans Franses, 2002. "Smooth Transition Autoregressive Models — A Survey Of Recent Developments," Econometric Reviews, Taylor & Francis Journals, vol. 21(1), pages 1-47.
    4. Rudiger Dornbusch, 1987. "Exchange Rates and Prices," NBER Working Papers 1769, National Bureau of Economic Research, Inc.
    5. Campa, Jose M. & Gonzalez, Jose M., 2002. "Differences in exchange rate pass-through in the euro area," IESE Research Papers D/479, IESE Business School.
    6. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
    7. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
    8. Ariel T. Burstein & Joao C. Neves & Sergio Rebelo, 2000. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based-Stabilizations," NBER Working Papers 7862, National Bureau of Economic Research, Inc.
    9. Froot, Kenneth A & Klemperer, Paul D, 1989. "Exchange Rate Pass-Through When Market Share Matters," American Economic Review, American Economic Association, vol. 79(4), pages 637-54, September.
    10. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
    11. 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.
    12. Campa, Jose M. & Chang, P. H. Kevin & Reider, Robert L., 1998. "Implied exchange rate distributions: evidence from OTC option markets1," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 117-160, February.
    13. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
    14. Marston, Richard C., 1990. "Pricing to market in Japanese manufacturing," Journal of International Economics, Elsevier, vol. 29(3-4), pages 217-236, November.
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    Cited by:
    1. Brun-Aguerre, Raphael & Fuertes, Ana-Maria & Phylaktis, Kate, 2012. "Exchange rate pass-through into import prices revisited: What drives it?," Journal of International Money and Finance, Elsevier, vol. 31(4), pages 818-844.

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