Exchange Rate Pass-Through into Import Prices

Abstract

We provide cross-country and time series evidence on the extent of exchange rate pass-through into the import prices of 23 OECD countries. We find compelling evidence of partial pass-through in the short run, especially within manufacturing industries. Over the long run, producer-currency pricing is more prevalent for many types of imported goods. Countries with higher rates of exchange rate volatility have higher pass-through elasticities, although macroeconomic variables have played a minor role in the evolution of pass-through elasticities over time. Far more important for pass-through changes in these countries have been the dramatic shifts in the composition of country import bundles. © 2005 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Driving forces of the Swiss output gap

“…Campa and Goldberg (2005) show that the degree of import passthrough elasticities is low in the short run and close to one in the long run for a range of OECD countries including Switzerland. This finding is confirmed by Bachmann (2012), who uses a vector error correction model to analyze Swiss data in contrast to the single equation approach pursued by Campa and Goldberg (2005). The log-linearized equations that describe this model and are used for estimation are provided herein.…”

“…Deviations from the classical small open economy model by Galí and Monacelli (2005) include the introduction of a law of one price (LOP) gap and the inclusion of habit persistence and indexation. The inclusion of a LOP gap is motivated by Campa and Goldberg (2005) and Bachmann (2012) who find a deviation from the LOP in the short run. The foreign economy is approximated by a VAR(2).…”

Market Entries and Exits and the Nonlinear Behaviour of the Exchange Rate Pass-Through into Import Prices

“…However, due to a safe haven effect, a much steeper appreciation tends to occur in times of international political or financial crises. To connect our results with the widely cited work of Campa and Goldberg (2005), p * t is measured by an import price index, e t by a nominal effective exchange rate index, and p t by a proxy for local production cost calculated from the product between a producer price index and the ratio between the nominal and real effective exchange rate index. For the case of Switzerland, the top right panel of Figure 1 depicts these variables for the period between the first quarter of 1980 up to the first quarter of 2013.…”

“…It is therefore not surprising that a plethora of empirical research has been devoted to estimating the pass-through effect. Campa and Goldberg (2005), Ihrig et al (2006), and Frankel et al (2011) provide some recent examples reporting estimates for several countries. Numerous other studies have dealt with the conditions of individual countries and industries.…”

“…Though it has long been recognised that, with sticky prices, different levels of inflation can give rise to differences in the ERPT between countries (e.g. Taylor, 2000;Gagnon and Ihrig, 2004;Campa and Goldberg, 2005;Choudhri and Hakura, 2006;Frankel et al, 2012), only recently, Al-Abri and Goodwin (2009) as well as Shintani et al (2013) have suggested that this might warrant nonlinear models to estimate the nexus between import prices and exchange rates. Arguably, when menu cost create a threshold delineating when an adjustment of import prices is worthwhile, the ERPT of a given country could vary between periods with low and high inflation.…”