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Vehicle currency pricing and exchange rate pass-through

Novy, Dennis, Chen, Natalie and Chung, Wanyu (2019) Vehicle currency pricing and exchange rate pass-through. CEP Discussion Papers (1624). Centre for Economic Performance, LSE, London, UK.

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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-thanexpected 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.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/_new/publications/series.asp?...
Additional Information: © 2019 The Authors
Divisions: Economics
Subjects: H Social Sciences > HF Commerce
H Social Sciences > HB Economic Theory
JEL classification: F - International Economics > F1 - Trade > F14 - Country and Industry Studies of Trade
F - International Economics > F3 - International Finance > F31 - Foreign Exchange
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
Date Deposited: 03 Dec 2019 12:03
Last Modified: 08 Dec 2019 01:03
URI: http://eprints.lse.ac.uk/id/eprint/102748

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