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Import prices and exchange rate pass-through: theory and evidence from the United Kingdom

  • Valerie Herzberg
  • George Kapetanios
  • Simon Price

The appreciation of sterling that began in 1996 appeared to pass through into import prices very slowly, an apparent example of incomplete exchange rate pass-through. Incomplete pass-through has typically been explained by a combination of sticky prices and pricing to market. This can have implications for the monetary transmission mechanism, making it important to establish whether this phenomenon exists in practice. One implication for firms' import (and domestic) price setting is that competitors' prices might affect the mark-up, although this is not a necessary condition. Some of the factors supporting pricing to market may also introduce non-linear responses to exchange rate shocks. It is established that a model of pricing to market including a role for competitors' prices fits the data, but no evidence of non-linearity is found.

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Paper provided by Bank of England in its series Bank of England working papers with number 182.

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Date of creation: Mar 2003
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Handle: RePEc:boe:boeewp:182
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