'Natural Hedging' of Exchange Rate Risk: The Role of Imported Input Prices
39 Pages Posted: 26 Jun 2012
Date Written: June 14, 2012
Using disaggregated quarterly trade data for Switzerland over 2004-2011, we study exchange rate pass through (ERPT) into imported intermediate input prices and its role in the price setting behavior of exporters. We explicitly include disaggregated proxies for imported input prices in our analyses to investigate whether Swiss exporters may have “naturally hedged” exchange rate risks by sourcing inputs from abroad, especially during periods of strong CHF appreciation. Our results indicate high ERPT into imported input prices in all sectors and strong sectoral ERPT heterogeneity on the export side in both the short and long-run. They also suggest the use of “natural hedging” as an effective strategy to reduce exchange rate risks. Significantly however, Swiss exporters may not have adjusted export pricing practice in response to a strong CHF in the wake of the Euro crisis, which questions central bank intervention during that period.
Keywords: Exchange rates, exchange-rate-pass-through, international trade, prices
JEL Classification: F31, F41
Suggested Citation: Suggested Citation