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

September 1, 2012

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Format: Chicago

Ehsan U. Choudhri, and Dalia S Hakura. The Exchange Rate Pass -Through to Import and Export Prices: The Role of Nominal Rigidities and Currency Choice, (USA: International Monetary Fund, 2012) accessed September 19, 2024

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.

Subject: Currencies, Exchange rate pass-through, Exchange rates, Export prices, Foreign exchange, Import prices, Money, Prices

Keywords: Africa, Currencies, Currency choice, Exchange rate, Exchange rate pass-through, Exchange rates, Export price, Export prices, Import and export prices, Import prices, Nominal rigidities, Pass-through coefficient, Pass-through elasticity, Price index, Price pass-through, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/226
Stock No:

WPIEA2012226
ISBN:

9781475510232
ISSN:

1018-5941

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