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Vehicle Currency Pricing and Exchange Rate Pass-Through

Natalie Chen (), Wanyu Chung and Dennis Novy ()

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: Using detailed firm-level transactions data for UK imports, we find that invoicing in a vehicle currency is pervasive, with more than half of transactions in our sample invoiced in neither sterling nor the exporter's currency. We then study the relationship between invoicing currency choices and the response of import prices to exchange rate changes. We find that for transactions invoiced in a vehicle currency, import prices are much more sensitive to changes in the vehicle currency than in the bilateral exchange rate. Pass-through therefore substantially increases once we account for vehicle currencies. Our results help to explain the higher-than-expected pass-through into import prices during the Great Recession and after the EU referendum. Finally, within a theoretical framework we conceptualize an omitted variable bias arising in estimating pass-through with only bilateral exchange rates under vehicle currency pricing. Overall, our results contribute to understanding the disconnect between exchange rates and prices.

Keywords: CPI; Dollar; Euro; exchange rate pass-through; inflation; invoicing; Sterling; UK; vehicle currency pricing (search for similar items in EconPapers)
JEL-codes: F14 F31 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon and nep-opm
Date: 2019-06
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http://cep.lse.ac.uk/pubs/download/dp1624.pdf (application/pdf)

Related works:
Working Paper: Vehicle Currency Pricing and Exchange Rate Pass-Through (2019) Downloads
Working Paper: Vehicle Currency Pricing and Exchange Rate Pass-Through (2018) Downloads
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