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The Exchange Rate Pass -Through to Import and Export Prices: The Role of Nominal Rigidities and Currency Choice

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  • Ehsan U. Choudhri
  • Ms. Dalia S Hakura

Abstract

Using both regression- and VAR-based estimates, the paper finds that the exchange rate pass-through to import prices for a large number of countries is incomplete and larger than the pass-through to export prices. Previous studies have reported similar results, which give rise to the puzzle that while local currency pricing is needed to account for incomplete import price pass-through, it would not imply a lower export price pass-through. Recent explanations of this puzzle have emphasized markup adjustment in response to exchange rate changes. This paper suggests an alternative explanation based on the presence of both producer and local currency pricing. Using a dynamic general equilibrium model, the paper shows that a mix of producer and local currency pricing can explain the pass-through evidence even with a constant markup. The model can also explain the observed exchange rate and inflation variability as well as the fact that the regression and VAR estimates tend to be similar.

Suggested Citation

  • Ehsan U. Choudhri & Ms. Dalia S Hakura, 2012. "The Exchange Rate Pass -Through to Import and Export Prices: The Role of Nominal Rigidities and Currency Choice," IMF Working Papers 2012/226, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2012/226
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    References listed on IDEAS

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    More about this item

    Keywords

    WP; exchange rate; price index; Exchange rate pass-through; import and export prices; nominal rigidities; currency choice; pass-through coefficient; price pass-through; export price; pass-through elasticity; Export prices; Import prices; Exchange rates; Currencies; Africa;
    All these keywords.

    JEL classification:

    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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