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Import prices and exchange rate pass-through: theory and evidence from the United Kingdom

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Valerie Herzberg
George Kapetanios
Simon Price

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Abstract

The appreciation of sterling that began in 1996 appeared to pass through into import prices very slowly, an apparent example of incomplete exchange rate pass-through. Incomplete pass-through has typically been explained by a combination of sticky prices and pricing to market. This can have implications for the monetary transmission mechanism, making it important to establish whether this phenomenon exists in practice. One implication for firms' import (and domestic) price setting is that competitors' prices might affect the mark-up, although this is not a necessary condition. Some of the factors supporting pricing to market may also introduce non-linear responses to exchange rate shocks. It is established that a model of pricing to market including a role for competitors' prices fits the data, but no evidence of non-linearity is found.

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Paper provided by Bank of England in its series Bank of England working papers with number 182.

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Martins Bitans, 2005. "Pass-Through of Exchange Rates to Domestic Prices in East European Countries and the Role of Economic Enviroment," Working Papers 2004/04, Latvijas Banka. [Downloadable!]
  2. Reginaldo P. Nogueira Junior & Miguel Leon-Ledesma, 2008. "Exchange Rate Pass-Through Into Inflation: The Role of Asymmetries and NonLinearities," Studies in Economics 0801, Department of Economics, University of Kent. [Downloadable!]
  3. Hamid Faruqee, 2004. "Exchange Rate Pass-Through in the Euro Area: The Role of Asymmetric Pricing Behavior," IMF Working Papers 04/14, International Monetary Fund. [Downloadable!]
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