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

35 Pages Posted: 1 Nov 2012

See all articles by Ehsan U. Choudhri

Ehsan U. Choudhri

Carleton University - Department of Economics

Dalia Hakura

International Monetary Fund (IMF)

Date Written: September 2012

Abstract

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.

Keywords: Exchange Rate Pass-through, Import And Export Prices, Nominal Rigidities, Currency Choice, Economic Models, Exchange Rates, Producer Prices

JEL Classification: E31, F42, E52, F41

Suggested Citation

Choudhri, Ehsan U. and Hakura, Dalia, The Exchange Rate Pass - Through to Import and Export Prices: The Role of Nominal Rigidities and Currency Choice (September 2012). IMF Working Paper No. 12/226, Available at SSRN: https://ssrn.com/abstract=2169770

Ehsan U. Choudhri (Contact Author)

Carleton University - Department of Economics ( email )

1125 Colonel By Drive
Ottawa, Ontario
Canada

Dalia Hakura

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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