The Effect of Exchange Rates on the Costs of Exporters When Inputs Are Denominated in Foreign Currencies

Econometric estimates of exchange rate pass-through usually assume that 100% of the exporter's costs are denominated in the exporter's currency. However, the literature on trade in value added indicates that a country's exports often include imported intermediates with costs that may be denominated in other currencies. Using international input-output tables, we analyze whether unrealistic assumptions about the currency denomination of costs can explain some of the evidence of partial exchange rate pass-through in the econometrics literature. We find that models of exchange rate pass-through that rely on the usual cost assumption are likely to significantly understate pass-through rates.