Time-varying exchange rate pass-through into terms of trade

Justas Dainauskas

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The U.S. invoices nearly all of its imports and exports in U.S. dollars. The U.S. terms of trade should therefore be “neutral” to movements in the U.S. dollar against other currencies. However, I find that the U.S. dollar pass-through into the U.S. terms of trade is: (i) on average positive and significant (31%); and (ii) it exhibits persistent time variation in the range of 10–60% over the period of 1990–2018. I argue that this can be explained by the changing primary commodity share in U.S. imports and the fact that commodity prices are invoiced, but not always “sticky”, in U.S. dollar terms. Without primary commodities, such as petroleum and crude oil, pass-through roughly halves and becomes relatively stable over time. Unlike trade in manufactured goods and services (i.e. non-commodities), trade in commodities thus preserves the conventional link between the exchange rate, terms of trade, and the current account.

Keywords: commodity prices; current account; dominant currency paradigm; exchange rate pass-through; state-space model; terms of trade (search for similar items in EconPapers)
JEL-codes: C32 E31 F31 F41 F47 (search for similar items in EconPapers)
Date: 2023-10-01
New Economics Papers: this item is included in nep-int, nep-mon and nep-opm
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Citations: View citations in EconPapers (1)

Published in Journal of International Money and Finance, 1, October, 2023, 137. ISSN: 0261-5606

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