The Effect of Exchange Rates on the Costs of Exporters When Inputs Are Denominated in Foreign Currencies

William Powers and David Riker

The International Trade Journal, 2015, vol. 29, issue 1, 3-18

Abstract: Econometric estimates of exchange rate pass-through usually assume that 100% of the exporter's costs are denominated in the exporter's currency. However, the literature on trade in value added indicates that a country's exports often include imported intermediates with costs that may be denominated in other currencies. Using international input-output tables, we analyze whether unrealistic assumptions about the currency denomination of costs can explain some of the evidence of partial exchange rate pass-through in the econometrics literature. We find that models of exchange rate pass-through that rely on the usual cost assumption are likely to significantly understate pass-through rates.

Date: 2015
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DOI: 10.1080/08853908.2014.966929

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