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Vehicle Currency Pricing and Exchange Rate Pass-Through

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  • Chen, Natalie
  • Chung, Wanyu
  • Novy, Dennis

Abstract

Using detailed firm-level transactions data for UK imports, this paper studies the relationship between invoicing currency choices and the response of import prices to exchange rate changes. We find that for transactions invoiced in a vehicle currency, import prices are much more sensitive to changes in the vehicle currency than in the bilateral exchange rate. Aggregate pass-through therefore substantially increases once we account for vehicle currencies. We also show how this translates into higher pass-through for UK consumer prices, in particular during the Great Recession and in the period following the Brexit referendum. Finally, we develop a theoretical framework to conceptualize exchange rate pass-through in the context of vehicle currency pricing. Overall, our results contribute to understanding the exchange rate disconnect puzzle, and have implications for the setting of monetary policy.

Suggested Citation

  • Chen, Natalie & Chung, Wanyu & Novy, Dennis, 2018. "Vehicle Currency Pricing and Exchange Rate Pass-Through," CEPR Discussion Papers 13085, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13085
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    Cited by:

    1. Holger Breinlich & Elsa Leromain & Dennis Novy & Thomas Sampson, 2019. "Exchange Rates and Consumer Prices: Evidence from Brexit," CESifo Working Paper Series 8001, CESifo.
    2. Corsetti, G. & Crowley, M. & Han, L., 2018. "Invoicing and the Dynamics of Pricing-to-market - Evidence from UK Export Prices around the Brexit Referendum," Cambridge Working Papers in Economics 1860, Faculty of Economics, University of Cambridge.
    3. Hobijn, Bart & Nechio, Fernanda & Shapiro, Adam Hale, 2021. "Using Brexit to identify the nature of price rigidities," Journal of International Economics, Elsevier, vol. 130(C).
    4. Yining Geng, 2020. "Impact of Family Planning Policy on Gender Inequality: Evidence from China," Working Papers 202008, University of Liverpool, Department of Economics.
    5. Anatoli Colicev & Joris Hoste & Jozef Konings, 2019. "Exchange Rate Pass-through after a Large Depreciation," Working Papers 201902, University of Liverpool, Department of Economics.
    6. Georgios Georgiadis & Saskia Mösle, 2020. "Introducing dominant‐currency pricing in the ECB's global macroeconomic model," International Finance, Wiley Blackwell, vol. 23(2), pages 234-256, August.
    7. Georgios Georgiadis & Ben Schumann, 2019. "Dominant-currency pricing and the global output spillovers from US dollar appreciation," GRU Working Paper Series GRU_2019_021, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    8. Costa, Rui & Dhingra, Swati & Machin, Stephen, 2019. "Trade and Worker Deskilling," CEPR Discussion Papers 13768, C.E.P.R. Discussion Papers.
    9. Hjortsoe, Ida & Lewis, John, 2020. "Non-linearities, asymmetries and dollar currency pricing in exchange rate pass-through: evidence from the sectoral level," Bank of England working papers 868, Bank of England.
    10. Crowley, M. A. & Han, L. & Son, M., 2020. "Dominant Currency Dynamics: Evidence on Dollar-invoicing from UK Exporters," Cambridge Working Papers in Economics 20113, Faculty of Economics, University of Cambridge.
    11. Nagengast, Arne J. & Bursian, Dirk & Menz, Jan-Oliver, 2021. "Dynamic pricing and exchange rate pass-through: Evidence from transaction-level data," European Economic Review, Elsevier, vol. 133(C).
    12. Yining Geng, 2020. "Impact of Family Planning Policy on Gender Inequality: Evidence from China," Working Papers 202009, University of Liverpool, Department of Economics.
    13. Georgiadis, Georgios & Gräb, Johannes & Khalil, Makram, 2019. "Global value chain participation and exchange rate pass-through," Working Paper Series 2327, European Central Bank.
    14. Mary Amiti & Oleg Itskhoki & Jozef Konings, 2018. "Dominant currencies How firms choose currency invoicing and why it matters," Working Paper Research 353, National Bank of Belgium.
    15. Giancarlo Corsetti & Meredith Crowley & Lu Han, 2020. "Invoicing and Pricing-to-market: Evidence on international pricing by UK exporters," Working Papers 202007, University of Liverpool, Department of Economics.
    16. Yohannes Ayele & L. Alan Winters, 2020. "How Do Exchange Rate Depreciations Affect Trade and Prices? A Survey and Lessons about UK Experience after June 2016," Working Paper Series 1420, Department of Economics, University of Sussex Business School.
    17. Corsetti, Giancarlo & Crowley, Meredith A & Han, Lu, 2018. "Invoicing and Pricing-to-Market: A Study of Price and Markup Elasticities of UK Exporters," CEPR Discussion Papers 13282, C.E.P.R. Discussion Papers.
    18. Ortega, Eva & Osbat, Chiara, 2020. "Exchange rate pass-through in the euro area and EU countries," Occasional Paper Series 241, European Central Bank.
    19. Bahaj, Saleem & Reis, Ricardo, 2020. "Jumpstarting an International Currency," CEPR Discussion Papers 14793, C.E.P.R. Discussion Papers.
    20. Rodnyansky, A., 2018. "(Un)Competitive Devaluations and Firm Dynamics," Cambridge Working Papers in Economics 1888, Faculty of Economics, University of Cambridge.

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    More about this item

    Keywords

    CPI; Dollar; euro; exchange rate pass-through; inflation; Invoicing; Sterling; UK; Vehicle Currency Pricing;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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