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Exchange rate pass-through into UK import prices

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Author Info
Haroon Mumtaz
Özlem Oomen
Jian Wang

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

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Handle: RePEc:boe:boeewp:312

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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.:

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  3. Campa, José Manuel & Goldberg, Linda S & González Mìnguez, Jose Manuel, 2005. "Exchange Rate Pass-Through to Import Prices in the Euro Area," CEPR Discussion Papers 5347, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February. [Downloadable!] (restricted)
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  5. Eiji Fuji & Jeannine Bailliu, 2004. "Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation," Computing in Economics and Finance 2004 135, Society for Computational Economics.
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  6. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Stefano Chiarlone, 2000. "Evidence of Product Differentiation and Relative Quality in Italian Trade," CESPRI Working Papers 114, CESPRI, Centre for Research on Innovation and Internationalisation, Universita' Bocconi, Milano, Italy, revised Jul 2000. [Downloadable!]
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  8. José Manuel Campa & Linda S. Goldberg, 2005. "Exchange Rate Pass-Through into Import Prices," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 679-690, December. [Downloadable!] (restricted)
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  9. 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. [Downloadable!] (restricted)
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  20. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
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  22. Joseph E. Gagnon & Jane Ihrig, 2001. "Monetary policy and exchange rate pass-through," International Finance Discussion Papers 704, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  26. Dalia Hakura & Ehsan U. Choudhri, 2001. "Exchange Rate Pass-Through to Domestic Prices: Does the Inflationary Environment Matter?," IMF Working Papers 01/194, International Monetary Fund. [Downloadable!]
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  27. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, vol. 40(3-5), pages 1007-1021, April. [Downloadable!] (restricted)
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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. 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. [Downloadable!]
  2. Jian Wang, 2007. "Home bias, exchange rate disconnect, and optimal exchange rate policy," Working Papers 0701, Federal Reserve Bank of Dallas. [Downloadable!]
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