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

Yunong Li and Teng Zhang

Emerging Markets Finance and Trade, 2018, vol. 54, issue 3, 690-706

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 exchange rate pass-through into the FOB export price of Chinese exports. This contrasts to the almost full exchange rate pass-through using OLS estimation. We further find that the export price of homogeneous goods, low-technology goods, and goods supplied by domestic non-SOEs is more sensitive to exchange rate changes.

Date: 2018
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DOI: 10.1080/1540496X.2016.1243940

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