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The exchange rate pass-through to import and export prices: The role of nominal rigidities and currency choice

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  • Choudhri, Ehsan U.
  • Hakura, Dalia S.

Abstract

Using both regression- and VAR-based estimates, the paper finds that the exchange rate pass-through to import prices for a large number of countries is incomplete and larger than the pass-through to export prices. Previous studies have reported similar results, which give rise to the puzzle that while local currency pricing is needed to account for incomplete import price pass-through, it would not imply a lower export price pass-through. Recent explanations of this puzzle have emphasized markup adjustment in response to exchange rate changes. This paper suggests an alternative explanation based on the presence of both producer and local currency pricing. Using a dynamic general equilibrium model, the paper shows that a mix of producer and local currency pricing can explain the pass-through evidence even with a constant markup. The model can also explain the observed variability of key variables as well as the fact that the regression and VAR estimates tend to be similar.

Suggested Citation

  • Choudhri, Ehsan U. & Hakura, Dalia S., 2015. "The exchange rate pass-through to import and export prices: The role of nominal rigidities and currency choice," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 1-25.
  • Handle: RePEc:eee:jimfin:v:51:y:2015:i:c:p:1-25
    DOI: 10.1016/j.jimonfin.2014.09.006
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    1. repec:bis:bisbps:95 is not listed on IDEAS
    2. Enders, Almira & Enders, Zeno & Hoffmann, Mathias, 2018. "International financial market integration, asset compositions, and the falling exchange rate pass-through," Journal of International Economics, Elsevier, vol. 110(C), pages 151-175.
    3. repec:rnp:ecopol:ep1733 is not listed on IDEAS
    4. Janine Aron & Ronald Macdonald & John Muellbauer, 2014. "Exchange Rate Pass-Through in Developing and Emerging Markets: A Survey of Conceptual, Methodological and Policy Issues, and Selected Empirical Findings," Journal of Development Studies, Taylor & Francis Journals, vol. 50(1), pages 101-143, January.
    5. repec:eee:riibaf:v:41:y:2017:i:c:p:247-259 is not listed on IDEAS
    6. Nidhaleddine Ben Cheikh & Christophe Rault, 2017. "Investigating first-stage exchange rate pass-through: Sectoral and macro evidence from euro area countries," The World Economy, Wiley Blackwell, vol. 40(12), pages 2611-2638, December.
    7. Eduardo Borensztein & Virginia Queijo Von Heideken, 2016. "Exchange Rate Pass-through in South America: An Overview," IDB Publications (Working Papers) 7779, Inter-American Development Bank.
    8. repec:ags:ijamad:262613 is not listed on IDEAS
    9. Eduardo Borensztein & Virginia Queijo Von Heideken, 2016. "Exchange Rate Pass-through in South America: An Overview," IDB Publications (Working Papers) 95196, Inter-American Development Bank.
    10. Stijn Claessens & M. Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: A survey," CAMA Working Papers 2017-76, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    11. Gregory De Walque & Thomas Lejeune & Yuliya Rychalovska & Rafael Wouters, 2017. "An estimated two-country EA-US model with limited exchange rate pass-through," Working Paper Research 317, National Bank of Belgium.
    12. El-Shagi, Makram & Zhang, Lin, 2016. "Macroeconomic trade effects of vehicle currencies: Evidence from 19th century China," IWH Discussion Papers 23/2016, Halle Institute for Economic Research (IWH).
    13. repec:spr:empeco:v:53:y:2017:i:2:d:10.1007_s00181-016-1129-x is not listed on IDEAS
    14. repec:eee:jmacro:v:56:y:2018:i:c:p:172-187 is not listed on IDEAS
    15. Mirdala, Rajmund, 2013. "Exchange Rate Pass-Through to Domestic Prices under Different Exchange Rate Regimes," MPRA Paper 53209, University Library of Munich, Germany.
    16. Mirdala, Rajmund, 2015. "Exchange Rate Pass-Through in the Euro Area," MPRA Paper 68862, University Library of Munich, Germany.
    17. repec:ags:pdcbeh:264628 is not listed on IDEAS
    18. repec:bla:jorssa:v:180:y:2017:i:2:p:587-612 is not listed on IDEAS
    19. Ali, Syed Zahid & Anwar, Sajid, 2017. "Exchange rate pass through, cost channel to monetary policy transmission, adaptive learning, and the price puzzle," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 69-82.
    20. repec:dug:journl:y:2017:i:1:p:144-158 is not listed on IDEAS
    21. Raphael, Brun-Aguerre & Ana-Maria, Fuertes & Matthew, Greenwood-Nimmo, 2016. "Heads I Win, Tails You Lose: Asymmetry in Exchange Rate Pass-Through Into Import Prices," MPRA Paper 71764, University Library of Munich, Germany.
    22. Siklos, Pierre L., 2018. "Boom-and-bust cycles in emerging markets: How important is the exchange rate?," Journal of Macroeconomics, Elsevier, vol. 56(C), pages 172-187.
    23. Salamat Ali, 2017. "Exchange Rate Effects on Agricultural Exports: Firm-level Evidence from Pakistan," Discussion Papers 2017-09, University of Nottingham, GEP.

    More about this item

    Keywords

    Exchange rate pass-through; Import and export prices; Nominal rigidities; Currency choice;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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