Exchange Rate Pass-Through, Currency of Invoicing and Market Share

Devereux, Michael B.; Tomlin, Ben; Dong, Wei

doi:10.3386/w21413

Cited by 32 publications

(31 citation statements)

References 43 publications

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“…This is also consistent with fixed costs in currency invoicing decisions. Devereux et al (2015) provide evidence that the market shares of both exporting and importing firms play a significant role in determining exchange rate pass-through and the currency of invoicing.…”

Section: Evidence On Factors Influencing Currency Choicementioning

confidence: 98%

The International Price System

Gopinath¹

2015

253

301

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I define and provide empirical evidence for an "International Price System" in global trade employing data for thirty-five developed and developing countries. This price system is characterized by two features. First, the overwhelming share of world trade is invoiced in very few currencies, with the dollar the dominant currency. Second, international prices, in their currency of invoicing, are not very sensitive to exchange rates at horizons of up to two years.

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Section: Evidence On Factors Influencing Currency Choicementioning

confidence: 98%

The International Price System

Gopinath¹

2015

253

301

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“…The parameters of the model are assumed to evolve according to random walks to account for potential instabilities over time, 16 Estimates for 2019Q2 are based on data available at the time of the cut-off date (Sept, 2019).…”

Section: Factor Model With Exogenous Informationmentioning

confidence: 99%

“…This section aims to help understand the link between movements in the euro/USD and euro area consumer prices. We analyse what types of shocks have driven the euro exchange rate fluctuations over the period 1995Q1-2019Q2 by examining historical shock decompositions from the SVAR-X detailed in Section 2 16 . To begin with, in Figure 1 we report the corresponding historical decomposition of quarter-on-quarter euro/USD exchange rate dynamics to better understand if the relative weight of different shocks significantly vary over time.…”

Section: An Aggregate Assessmentmentioning

confidence: 99%

Exchange Rate Shocks and Inflation Comovement in the Euro Area

2019

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This paper decomposes the time-varying effect of exogenous exchange rate shocks on euro area countries infl ation into country-specifi c (idiosyncratic) and region-wide (common) components. To do so, we propose a fl exible empirical framework that is based on dynamic factor models subject to drifting parameters and exogenous information. We show that exogenous shocks to the euro/USD account for over 50% of the nominal euro/ USD exchange rate fl uctuations in more than 1/3 of the quarters over the past six years -especially in turning points periods. Our main results indicate that headline infl ation in euro area countries, and in particular its energy-related component, has signifi cantly become more affected by these exogenous exchange rate shocks since the early 2010s, in particular, for the largest economies of the region. While such increasing sensitivity relies solely on a sustained surge in the degree of comovement for headline infl ation, it is also based on a higher region-wide effect of the shocks for the case of energy infl ation. Instead, purely exogenous exchange rate shocks do not seem to have a signifi cant effect on the core component of headline infl ation, which also displays a lower degree of comovement across euro area countries.Keywords: exchange rate, infl ation, factor model, structural VAR model. JEL classifi cation: E31, F3, F41. ResumenEste artículo estudia la evolución a lo largo del tiempo de la traslación a la infl ación en los distintos países del área del euro de perturbaciones puramente exógenas al tipo de cambio del euro. Esta evolución se descompone en un factor específi co de país y en otro común a toda el área. Para ello, se propone un enfoque empírico fl exible, basado en un modelo de factores dinámico con parámetros cambiantes en el tiempo e información exógena.Se encuentra que, para más de un tercio del tiempo en los seis últimos años, y especialmente en sus puntos de giro, más del 50 % de las fl uctuaciones del tipo de cambio nominal EUR/USD se han debido a perturbaciones puramente exógenas del tipo de cambio. Los principales resultados de este artículo apuntan a que la infl ación total en los países del área del euro, y particularmente su componente energético, se ha visto signifi cativamente más afectada por estas perturbaciones exógenas del tipo de cambio desde comienzos del 2010, especialmente en el caso de las mayores economías de la región. Mientras que esta mayor sensibilidad de la infl ación total descansa exclusivamente en el superior comovimiento estimado entre las infl aciones de los países, en el caso de la infl ación energética se debe también a una mayor respuesta a dichas perturbaciones del tipo de cambio del factor común del área del euro. Sin embargo, el componente de la infl ación que excluye alimentos y energía no responde de forma signifi cativa a las perturbaciones cambiarias y, además, muestra un menor grado de correlación entre los países del área.Palabras clave: tipo de cambio, infl ación, modelo de factores, modelo VAR estructural.

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“…The largest and most well-known branch of literature focuses on explaining the substantial differences in pass-through across countries by examining their structural characteristics. This literature has documented a number of characteristics that are important, such as: openness and the composition of imported goods Goldberg, 2005 and, the extent of nominal rigidities Yetman, 2003, andCorsetti et al, 2008), the role of foreign currency pricing, especially in invoicing , Gopinath, 2015, and Devereux et al, 2015, the dispersion of price changes (Berger and Vavra, 2015), the frequency of price adjustments , the inflation-fighting credibility of the central bank (Taylor, 2000, Gagnon and Ihrig, 2004, Choudri and Hakura, 2006, Caselli and Roitman, 2016and Carriere-Swallow et al, 2016, and the extent of monopoly power and competition in product markets (Devereux et al, 2015, andAmiti et al, 2016). 2 A subset of this literature attempts to explain gradual changes in pass-through across time resulting from structural changes in specific economies.…”

Section: Introductionmentioning

confidence: 99%

Shocks versus Structure: Explaining Differences in Exchange Rate Pass-Through across Countries and Time

2017

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We show that exchange rate pass-through to consumer prices varies not only across countries, but also over time. Previous literature has highlighted the role of an economy's 'structure' -such as its inflation volatility, inflation rate, use of foreign currency invoicing, and openness -in explaining these variations in pass-through. We use a sample of 26 advanced and emerging economies to show which of these structural variables are significant in explaining not only differences in pass-through across countries, but also over time. The 'shocks' leading to exchange rate movements can also explain variations in pass-through over time. For example, exchange rate movements caused by monetary policy shocks consistently correspond to significantly higher estimates of pass-through than those caused by demand shocks. The role of 'shocks' in driving pass-through over time can be as large as that of structural variables, and even larger for some countries. As a result, forecasts predicting how a given exchange rate movement will impact inflation at a specific point in time should take into account not just an economy's 'structure', but also the 'shocks'.

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Exchange Rate Pass-Through, Currency of Invoicing and Market Share

Cited by 32 publications

References 43 publications

The International Price System

The International Price System

Exchange Rate Shocks and Inflation Comovement in the Euro Area

Shocks versus Structure: Explaining Differences in Exchange Rate Pass-Through across Countries and Time

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