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Incomplete Exchange Rate Pass-Through: Evidence from Exchange Rate Reform in China

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  • Teng Zhang
  • Yunong Li

Abstract

Exchange rate disconnect is one of the central puzzles in international macroeconomics. Recently there is a growing literature that studies the microeconomic foundations or mechanisms for incomplete exchange rate pass-through. However, the estimations of the exchange rate pass-through vary widely in the existing literature. Our article proposes the use of a policy-based instrumental variable for exchange rate, exploiting the exchange rate reform in China, and finds that 67% of the exchange rate pass-through into the f.o.b. export price of Chinese exports. This is in contrast with the almost full exchange rate pass-through using ordinary least squares (OLS) estimation. We further find that the export price of homogeneous goods, low-technology goods and goods supplied by domestic non-state-owned enterprises (non-SOEs) is more sensitive to exchange rate changes.

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  • Teng Zhang & Yunong Li, 2017. "Incomplete Exchange Rate Pass-Through: Evidence from Exchange Rate Reform in China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(3), pages 710-726, March.
    • Handle: RePEc:mes:emfitr:v:53:y:2017:i:3:p:710-726
    DOI: 10.1080/1540496X.2016.1254066
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    Cited by:

    1. Vo The Anh & Le Thai Thuong Quan & Nguyen Van Phuc & Ho Minh Chi & Vo Hong Duc, 2021. "Exchange Rate Pass-Through in ASEAN Countries: An Application of the SVAR Model," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(1), pages 21-34, January.

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