Exchange Rate Pass-Through in a Small Open Economy: Panel Evidence from Hong Kong
This paper presents estimates of exchange rate pass-through derived from a panel of very disaggregated import unit-values to Hong Kong. The estimation approach builds on that utilized by Knetter (1989, 1993) to study export pricing and pricing to market. The three-dimensional data set examined comprises Hong Kong's top eight floating exchange rate trading partners, and twenty-one of the top five-digit SITC imports since 1992. Pass-through estimates for Hong Kong imply relatively faster import price adjustment than is typically found for larger, less open economies. These estimates are robust to a number of sensitivity tests. Finally these results confirm, from a different perspective, findings by Parsley (2001) that deviations from the law of one price play a relatively smaller role in real exchange rate movements for Hong Kong than for other East Asian countries.
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