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

Author/Editor:

Ehsan U. Choudhri ; Dalia S Hakura

Publication Date:

September 1, 2012

Electronic Access:

Free Full Text (PDF file size is 1047 KB).Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 12/226

Subject:

English

Publication Date:

September 1, 2012

ISBN/ISSN:

9781475510232/1018-5941

Stock No:

WPIEA2012226

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

34

Please address any questions about this title to publications@imf.org