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Exchange rate pass-through, domestic competition and inflation -- evidence from the 2005/08 revaluation of the Renminbi

Raphael Auer

No 68, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: How important is the effect of exchange rate fluctuations on the competitive environment faced by domestic firms and the prices they charge? To answer this question, this paper examines the 17 percent appreciation of the yuan against the U.S. dollar from 2005 to 2008. In a monthly panel covering 110 sectors, a 1 percent appreciation of the Yuan increases U.S. import prices by roughly 0.8 percent. It is then shown that import prices, in turn, pass through into producer prices at an average rate of roughly 0.7, implying that a 1 percent Yuan appreciation increases the average U.S. producer price of tradable goods by 0.8 percent*0.7=0.56 percent. In contrast, exchange rate movements of other trade partners have much smaller effects on import prices and hardly any effect on producer prices. The paper next demonstrates that the pass through response into import prices is heterogeneous across sectors with different characteristics such as traded-input intensity or the shape of demand for the sector's goods. In contrast, the rate at which import prices pass through into domestic producer prices is found to be homogenous across the sectors. Finally, the insights of the analysis are employed to simulate the inflationary effect of a Yuan revaluation. For example, the relative price shock caused by a 25 percent appreciation of the Yuan spread evenly over 10 months is equivalent to a temporary increase of the U.S. PPI inflation rate by over five percentage points. Because such an appreciation would also influence the overall skewness of the distribution of price changes at the sectoral level, it would likely also impact U.S. equilibrium inflation.

JEL-codes: E31 F11 F12 F14 F15 F16 F40 L16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cis, nep-mon and nep-opm
Date: 2011
Note: Published as: Auer, Raphael (2015), "Exchange Rate Pass-Through, Domestic Competition and Inflation: Evidence from the 2005-08 Revaluation of the Renminbi," Journal of Money, Credit and Banking 47 (8): 1617-1650.
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http://www.dallasfed.org/assets/documents/institute/wpapers/2011/0068.pdf (application/pdf)

Related works:
Journal Article: Exchange Rate Pass‐Through, Domestic Competition, and Inflation: Evidence from the 2005–08 Revaluation of the Renminbi (2015) Downloads
Working Paper: Exchange Rate Pass-Through, Domestic Competition, and Inflation: Evidence from the 2005/08 Revaluation of the Renminbi (2015) Downloads
Working Paper: Exchange Rate Pass-Through, Domestic Competition, and Infl?ation: Evidence from the 2005/08 Revaluation of the Renminbi (2014) Downloads
Working Paper: Exchange Rate Pass-Through, Domestic Competition, and Inflation: Evidence from the 2005/08 Revaluation of the Renminbi (2012) Downloads
Working Paper: Exchange Rate Pass-Through, Domestic Competition, and Inflation: Evidence from the 2005/08 Revaluation of the Renminbi (2012) Downloads
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