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EXCHANGE RATE PASS-THROUGH INTO IMPORT PRICES Paper by: José Manuel Campa Linda S. Goldberg Presentation by:Fanta Nicolas Mohylová Aneta Polena Michal Veselý Vladimír
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Outline Introduction Methodology Results Conclusion
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Basic terms Exchange rate pass-through Measure of how responsive international prices are to changes in the exchange rate Complete vs. zero exchange rate pass-through PCP – producer-currency pricing Prices preset by exporters Complete pass-through The law of one price holds LCP – local-currency pricing Firms preset prices on the export markets Zero pass-through The law of one price violated whenever exchange rate fluctuates unexpectedly
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Motivation Long been of various interest Recently central role in heated debates over appropriate monetary policies and exchange rate regime optimality The evidence of exchange rate pass-through for 23 OECD countries What explains the difference in pass-through rates across different countries? The stability of exchange pass-through rates – Brazilian experience extended to the OECD countries? The drivers of the changes in pass-through rates Aggregated vs. disaggregated import prices
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Outline Introduction Methodology Results Conclusion
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Methodology
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Data 23 OECD countries Quarterly data 1975 – 2003 Nominal and real exchange rates GDP Export partner cost proxy Import prices indices Aggregated Disaggregated Food Manufacturing Energy Raw materials Nonmanufactured products
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Outline Introduction Methodology Results Conclusion
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Results
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LLP versus PCP LLP = local currency pricing PCP = producer currency pricing LCP represents a null hypothesis of zero pass-through whereas PCP implies a pass-through of unity LCP can be rejected for 20 of the 23 countries in the short run and 18 of 23 in the long run PCP can also be rejected in the short run 22 out of the 23 countries and 7 of 23 in the long run
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Differences in Aggregate Pass-through The hypothesis of a same pass-through elasticity across countries was rejected at a 1% level What are the causes of the differences in elasticities? Stability of local monetary policy (Devereux and Engel (2001)) If the exporters choose PCP and their country have a stable monetary policy ⇒ their export prices should be more stable All else equal, exchange rate pass-through should be higher for countries with more volatile monetary policy Exchange rate variability and local monetary volatility could also enter through exporter competition for market share (Froot and Klemperer (1989)) Exchange rate pass-through may be lower when nominal exchange rate variability is high and exporters to a country try to maintain local market share Countries can have different sector-specific openness The pass-trough elasticity for raw materials can be higher than for food
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Differences in Aggregate Pass-through
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Stability of Aggr. Pass-through Elasticities There is a mix of increases and decreases in exchange rate pass-through elasticities across countries SR and LR exchange rate pass-through elasticities declined for 15 of the 21 countries, and increased for the other 6 countries (only 3 cases significant) There is also evidence supporting structural breaks in pass-through short-run pass-through stability is rejected for 7 countries We can never reject stability of long-run pass-through according to these tests
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Exchange Rate Pass-through into Disaggregated Import Prices The OECD assembles data on disaggregated import prices at the country level for the five product categories
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Exchange Rate Pass-through into Disaggregated Import Prices cont'd… The authors reject the hypothesis of zero exchange rate pass-through (LCP) for each product category except energy They similarly reject complete pass-through (PCP) for manufacturing and food Manufacturing imports has the strongest evidence support of partial pass- through (19 out of 22 countries). Food shows partial pass-through in the short as well
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Different pass-through elasticities across industries Manufacturing imports was taken as a base and compared to other industries (M. average pass-through elasticity = 0.43) Food was not statistically different (F. average pass-through elasticity = 0.46) Most extreme case were energy product with 9 out of 22 countries with statistically different coefficients (E. average pass-through elasticity = 0.75)
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The Evolution in Import Composition Manufacturing imports were typically less that 50% of the overall import for most countries in 1980 By 1992, 65% of imports in the OECD countries were manufactured products 70% was the average share of manufactured imports in total imports for the OECD in 2002
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Understanding the Evolution of Aggregate Pass-through The effect of the import composition and macroeconomic conditions on markups can change the aggregate import-price pass-through However, approximately only 30% of the observed differences over time in the short-run pass-through elasticities of countries are explained by macro variablesimputed trade shares and time dummies The key explanatory determinant for sensitivity of import prices to exchange rates in the short-run and long-run is import trade composition
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Outline Introduction Methodology Results Conclusion
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46% of exchange rate fluctuations in the short run, and nearly 65% over the long run is reflected in import prices in local currencies Partial pass-through elasticities are the best explenation of import price in the short run. In the long run there is more evidence for producer currency pricing Even though macroeconomic variables are significant in the model, they have a small effect on the development of pass-through elasticities over time. Composition of import bundles have proved to be more important in explaining pass-through changes across OECD countries
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Thank you for your attention
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References * CAMPA, Jose a Linda S GOLDBERG. Exchange rate pass-through into import prices. Harvard College and the Massachusetts Institute of Technology, [2005]. The Review of Economics and Statistics. *All tables, graphs and data in this presentation are taken from the above mentioned reference.
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