Imported Intermediate Goods and Incomplete Exchange Rate Pass-Through into Export Prices

This paper analyses the effects of imported inputs and exporting country size on the degree of exchange rate pass-through (ERPT). In my model, firms are oligopolistic competitors who set variable markups and import... [ view full abstract ]

This paper analyses the effects of imported inputs and exporting country size on the degree of exchange rate pass-through (ERPT). In my model, firms are oligopolistic competitors who set variable markups and import intermediate inputs. The model predicts: (i) imported inputs reduce producer currency ERPT and (ii) a higher exporting country share in a destination market raises ERPT. Using industry-level data for 61 countries over 2000-2015, I test these hypotheses. For trade between advanced economies, results support the prediction that imported inputs reduce ERPT -- and only in the case of producer currency movements. Controlling for the exporting country share, after a 10% appreciation of the producer currency, the export price index rises by 3.8% when there are no imported inputs, but by 1.3% when the share of imported inputs in gross exports is one half.

JEL codes: F12, F14, F31, F41