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Estimating the elasticity of consumer prices to the exchange rate: An accounting approach

Author

Listed:
  • Hadrien Camatte

    (Banque de France - Banque de France - Banque de France)

  • Guillaume Daudin

    (DIAL - Développement, institutions et analyses de long terme, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po, LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Violaine Faubert

    (Banque de France - Banque de France - Banque de France)

  • Christine Rifflart

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract

We analyze the elasticity of the household consumption expenditure (HCE) deflator to the exchange rate, using world input–output tables (WIOTs) from 1995 to 2019. In line with the existing literature, we find a modest output-weighted elasticity of around 0.1. This elasticity is stable over time but heterogeneous across countries, ranging from 0.05 to 0.22. Such heterogeneity mainly reflects differences in the foreign product content of consumption and intermediate products. Direct effects through imported consumption and intermediate products entering domestic production explain most of the transmission of exchange rate appreciation to domestic prices. By contrast, indirect effects linked to participation in global value chains play a limited role. Our results are robust to using four different WIOT datasets. As WIOTs are data-demanding and available with a lag of several years, we extrapolate a reliable year- and country-specific estimate of HCE deflator's elasticity from 2015 onwards, using trade data and GDP statistics.

Suggested Citation

  • Hadrien Camatte & Guillaume Daudin & Violaine Faubert & Christine Rifflart, 2023. "Estimating the elasticity of consumer prices to the exchange rate: An accounting approach," SciencePo Working papers Main hal-04346555, HAL.
    • Handle: RePEc:hal:spmain:hal-04346555
    DOI: 10.1016/j.jimonfin.2023.102913
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Input-output linkages; Spillovers; Global value chains; Cost-push inflation;
    All these keywords.

    JEL classification:

    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models
    • 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
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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