Exchange-rate pass-through

Example

Suppose that the US imports widgets from the UK. The widgets cost $10 and £1 costs $1. Then the British Pound appreciates against the dollar and now £1 costs $1.50. Also suppose that the widgets now cost $12.5

There has been a 50% change in the exchange rate and a 25% change in price. The exchange rate pass-through is :\frac{25%}{50%}=.5. For every 1% increase in the exchange rate, there has been a .5% increase in the price of the widgets.

Measurement

The "standard pass-through regression" is :\Delta \ln p_{t} = \alpha+\sum_{i=0}^N\gamma_i \Delta \ln e_{t-i}+\delta \Delta \ln c_t+ \psi\Delta \ln d_t +\epsilon_t, where p is import price, e is the exchange rate, c is marginal costs, d is demand, and \Delta denotes a first difference. The exchange-rate pass-through after N periods is :\sum_{i=0}^N\gamma_i.

Campa and Goldberg (2005) estimated the long-run exchange-rate pass-through to import prices for the following countries, averaging across the countries from which imports came:

Measurement of exchange-rate pass-through is typically performed using aggregate price indexes. and how globalization caused a decrease in exchange-rate pass-through.

References

References

1. (1997). "Goods prices and exchange rates: What have we learned?". Journal of Economic Literature.
2. (2005). "Exchange Rate Pass-Through into Import Prices". Review of Economics and Statistics.
3. (2008). "Sticky Borders". Quarterly Journal of Economics.
4. (2012). "How do Different Exporters React to Exchange Rate Changes?". Quarterly Journal of Economics.
5. (2014). "The Effect of Firm-Level Productivity on Exchange Rate Pass-Through". Economics Letters.