Exchange rate pass-through into UK import prices

Haroon Mumtaz, Özlem Oomen and Jian Wang

Bank of England working papers from Bank of England

Abstract: In this paper we estimate the rate of exchange rate pass-through (ERPT) into UK import prices using disaggregate data at the SITC-2 and SITC-3 digit level. Consistent with earlier studies, we find evidence for significant heterogeneity among the estimated industry-specific pass-through rates. In an environment where cross-sectional heterogeneity is significant the use of aggregate data can be misleading since aggregation may lead to heavily biased ERPT estimates at the economy-wide level. We demonstrate that the aggregation bias caused by this heterogeneity is not negligible for the UK data. Further, we investigate the source of the cross-sectional variation in the estimated industry-specific pass-through rates. For our sample, we find the industry-specific average inflation rates to be significant in explaining this variation. Furthermore, we find evidence for short-run and long-run partial pass-through into food and manufacturing sectors. As for the economy-wide ERPT the conclusion stands, possibly reflecting the relatively large weight of manufacturing goods in UK imports. Finally, we find a significant reduction in estimated ERPT rates since 1995 caused by increased stability of the UK economy over the past decade.

Date: 2006-11
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Citations: View citations in EconPapers (48)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:312

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