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Industry heterogeneity and exchange rate pass-through

Summary:
BIS Working Papers  |  No 787  |  04 June 2019 by  Camila Casas PDF full text (866kb)  |  65 pages Summary Focus I analyse the relationship at the industry level between the exchange rate pass-through to export and import prices and volumes and the use of imported inputs in production. Contribution This paper contributes to the literature on incomplete pass-through and its determinants. Specifically, I focus on the role of imported inputs in determining trade prices and volumes, for both exports and imports. I analyse two separate sources of heterogeneity in the effects of imported inputs:

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BIS Working Papers  |  No 787  | 
04 June 2019
PDF full text
 (866kb)
 |  65 pages

Summary

Focus

I analyse the relationship at the industry level between the exchange rate pass-through to export and import prices and volumes and the use of imported inputs in production.

Contribution

This paper contributes to the literature on incomplete pass-through and its determinants. Specifically, I focus on the role of imported inputs in determining trade prices and volumes, for both exports and imports. I analyse two separate sources of heterogeneity in the effects of imported inputs: the share of imports in total input purchases; and the elasticity of output with respect to intermediate inputs (the relative importance of inputs for production). Although I use detailed firm-level data for my estimations, the relationship between the use of imported inputs and the exchange rate pass-through is examined at the industry level. The sector-level analysis can be useful for policymakers whenever detailed firm-level data are not available.

Findings

Using microdata from Colombia, I find significant variations in industries' use of imported inputs that can be explained mainly by differences in the share of imported inputs in firms' total input purchases. The exchange rate pass-through to export prices varies significantly across industries as well. The pass-through estimates correlate positively with the use of imported inputs at the two-digit manufacturing industry level: industries with a larger share of imported inputs tend to have a higher exchange rate pass-through to both export and import prices. The correlation is stronger for export prices, but the effect on the pass-through to import prices is also positive. I also find that the response of exported and imported quantities to changes in the exchange rate varies across industries, but I do not find a clear correlation between the estimated elasticities and the use of imported inputs.

 

Abstract

In the presence of price rigidities, nominal exchange rate fluctuations can have real effects on the economy. External shocks may have differentiated effects across economic sectors depending on firms' marginal cost structure and features of the demand they face, such as strategic complementarities. I analyse the relationship between the exchange rate pass-through to export and import prices and volumes and the use of imported inputs in production, an important determinant of marginal cost. Using microdata from Colombia, I show that manufacturing industries differ significantly in their use of imported inputs and in the estimated exchange rate pass-through. I find a clear correlation between the use of imported inputs and the response of prices to changes in exchange rates. That is, the exchange rate pass-through to prices tends to be larger for industries in which firms use a larger share of imported inputs. The link is stronger in the case of exports, but the effect on the pass-through to import prices is also positive. In contrast, I do not find a clear correlation between the use of imported inputs and the response of traded quantities to changes in exchange rates.

JEL classification: F1, F2, L2, L6

Keywords: exchange rate pass-through, export and import prices, export and import volumes, intermediate inputs

International Settlement
The Bank for International Settlements (BIS) is an international company limited by shares owned by central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks". The BIS carries out its work through subcommittees, the secretariats it hosts and through an annual general meeting of all member banks. It also provides banking services, but only to central banks and other international organizations. It is based in Basel, Switzerland, with representative offices in Hong Kong and Mexico City.

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