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Time-varying exchange rate pass-through into terms of trade

Dainauskas, Justas ORCID: 0000-0002-1425-8921 (2023) Time-varying exchange rate pass-through into terms of trade. Journal of International Money and Finance, 137. ISSN 0261-5606

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Identification Number: 10.1016/j.jimonfin.2023.102905


The U.S. invoices nearly all of its imports and exports in U.S. dollars. The U.S. terms of trade should therefore be “neutral” to movements in the U.S. dollar against other currencies. However, I find that the U.S. dollar pass-through into the U.S. terms of trade is: (i) on average positive and significant (31%); and (ii) it exhibits persistent time variation in the range of 10–60% over the period of 1990–2018. I argue that this can be explained by the changing primary commodity share in U.S. imports and the fact that commodity prices are invoiced, but not always “sticky”, in U.S. dollar terms. Without primary commodities, such as petroleum and crude oil, pass-through roughly halves and becomes relatively stable over time. Unlike trade in manufactured goods and services (i.e. non-commodities), trade in commodities thus preserves the conventional link between the exchange rate, terms of trade, and the current account.

Item Type: Article
Additional Information: © 2023 The Author(s)
Divisions: Economics
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: C - Mathematical and Quantitative Methods > C3 - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors > C32 - Time-Series Models
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
F - International Economics > F3 - International Finance > F31 - Foreign Exchange
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F47 - Forecasting and Simulation
Date Deposited: 16 Aug 2023 16:42
Last Modified: 16 Jun 2024 22:36

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