Incomplete Exchange Rate Pass-Through: Evidence from Exchange Rate Reform in China

Teng Zhang and Yunong Li

Emerging Markets Finance and Trade, 2017, vol. 53, issue 3, 710-726

Abstract: Exchange rate disconnect is one of the central puzzles in international macroeconomics. Recently there is a growing literature that studies the microeconomic foundations or mechanisms for incomplete exchange rate pass-through. However, the estimations of the exchange rate pass-through vary widely in the existing literature. Our article proposes the use of a policy-based instrumental variable for exchange rate, exploiting the exchange rate reform in China, and finds that 67% of the exchange rate pass-through into the f.o.b. export price of Chinese exports. This is in contrast with the almost full exchange rate pass-through using ordinary least squares (OLS) estimation. We further find that the export price of homogeneous goods, low-technology goods and goods supplied by domestic non-state-owned enterprises (non-SOEs) is more sensitive to exchange rate changes.

Date: 2017
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DOI: 10.1080/1540496X.2016.1254066

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