Exchange Rate Pass-Through into UK Import Prices

25 Pages Posted: 27 Feb 2007

See all articles by Haroon Mumtaz

Haroon Mumtaz

Bank of England; University of London - School of Sciences

Ozlem Oomen

Bank of England

Jian Wang

The Chinese University of Hong Kong, Shenzhen; Shenzhen Finance Institute

Date Written: November 2006

Abstract

In this paper we estimate the rate of exchange rate pass-through (ERPT) into UK import prices using disaggregate data at the SITC-2 and SITC-3 digit level. Consistent with earlier studies, we find evidence for significant heterogeneity among the estimated industry-specific pass-through rates. In an environment where cross-sectional heterogeneity is significant the use of aggregate data can be misleading since aggregation may lead to heavily biased ERPT estimates at the economy-wide level. We demonstrate that the aggregation bias caused by this heterogeneity is not negligible for the UK data. Further, we investigate the source of the cross-sectional variation in the estimated industry-specific pass-through rates. For our sample, we find the industry-specific average inflation rates to be significant in explaining this variation. Furthermore, we find evidence for short-run and long-run partial pass-through into food and manufacturing sectors. As for the economy-wide ERPT the conclusion stands, possibly reflecting the relatively large weight of manufacturing goods in UK imports. Finally, we find a significant reduction in estimated ERPT rates since 1995 caused by increased stability of the UK economy over the past decade.

Keywords: Exchange rate pass-through, aggregation bias, structural breaks

JEL Classification: F3, F4, C33

Suggested Citation

Mumtaz, Haroon and Mumtaz, Haroon and Oomen, Ozlem and Wang, Jian, Exchange Rate Pass-Through into UK Import Prices (November 2006). Bank of England Working Paper No. 312, Available at SSRN: https://ssrn.com/abstract=965463 or http://dx.doi.org/10.2139/ssrn.965463

Haroon Mumtaz (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

University of London - School of Sciences ( email )

London, WC1E 7HX
United Kingdom

Ozlem Oomen

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Jian Wang

The Chinese University of Hong Kong, Shenzhen ( email )

HOME PAGE: http://jianwang.weebly.com

Shenzhen Finance Institute ( email )

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