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Exchange rate pass-through into UK import prices

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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 UK import prices using disaggregate data at the SITC-2 and SITC-3 digit level. Consistent with earlier studies, we find evidence for significant heterogeneity among the estimated industry-specific pass-through rates. In an environment where cross-sectional heterogeneity is significant the use of aggregate data can be misleading since aggregation may lead to heavily biased ERPT estimates at the economy-wide level. We demonstrate that the aggregation bias caused by this heterogeneity is not negligible for the UK data. Further, we investigate the source of the cross-sectional variation in the estimated industry-specific pass-through rates. For our sample, we find the industry-specific average inflation rates to be significant in explaining this variation. Furthermore, we find evidence for short-run and long-run partial pass-through into food and manufacturing sectors. As for the economy-wide ERPT the conclusion stands, possibly reflecting the relatively large weight of manufacturing goods in UK imports. Finally, we find a significant reduction in estimated ERPT rates since 1995 caused by increased stability of the UK economy over the past decade.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 312.

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Date of creation: Nov 2006
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Handle: RePEc:boe:boeewp:312

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Citations

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Cited by:
  1. Belke, Ansgar & Beckmann, Joscha & Verheyen, Florian, 2013. "Exchange rate pass-through into German import prices - a disaggregated perspective," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79855, Verein für Socialpolitik / German Economic Association.
  2. Jinbin Wang & Nan Li, 2010. "Exchange rate pass-through: The case of China," Frontiers of Economics in China, Springer, vol. 5(3), pages 356-374, September.
  3. Roman Horváth & Michal Franta & Marek Rusnák, 2012. "Evaluating Changes in the Monetary Transmission Mechanism in the Czech Republic," Working Papers IES 2012/11, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Apr 2012.
  4. Mumtaz, Haroon & Sunder-Plassmann, Laura, 2010. "Time-varying dynamics of the real exchange rate. A structural VAR analysis," Bank of England working papers 382, Bank of England.
  5. Aron, Janine & Farrell, Greg & Muellbauer, John & Sinclair, Peter, 2010. "Exchange Rate Pass-through and Monetary Policy in South Africa," CEPR Discussion Papers 8153, C.E.P.R. Discussion Papers.
  6. Wang, Jian, 2010. "Home bias, exchange rate disconnect, and optimal exchange rate policy," Journal of International Money and Finance, Elsevier, vol. 29(1), pages 55-78, February.
  7. Eike Berner, 2010. "Exchange rate pass-through: new evidence from German micro data," Economie Internationale, CEPII research center, issue 124, pages 75-100.
  8. Toshitaka Sekine, 2006. "Time-varying exchange rate pass-through: experiences of some industrial countries," BIS Working Papers 202, Bank for International Settlements.
  9. Liu, Philip & Mumtaz, Haroon & Theophilopoulou, Angeliki, 2011. "International transmission of shocks: a time-varying factor-augmented VAR approach to the open economy," Bank of England working papers 425, Bank of England.
  10. Roberto Álvarez & Patricio Jaramillo & Jorge Selaive, 2008. "Exchange Rate Pass-Through into Import Prices: The Case of Chile," Working Papers Central Bank of Chile 465, Central Bank of Chile.
  11. Liu, Philip & Mumtaz, Haroon, 2010. "Evolving macroeconomic dynamics in a small open economy: an estimated Markov-switching DSGE model for the United Kingdom," Bank of England working papers 397, Bank of England.

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