'Natural Hedging' of Exchange Rate Risk: The Role of Imported Input Prices

39 Pages Posted: 26 Jun 2012

See all articles by Dario Fauceglia

Dario Fauceglia

University of St. Gallen

Anirudh Shingal

S.P. Jain Institute of Management & Research; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS); University of Bern - World Trade Institute

Martin Wermelinger

University of St. Gallen

Date Written: June 14, 2012

Abstract

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

Fauceglia, Dario and Shingal, Anirudh and Wermelinger, Martin, 'Natural Hedging' of Exchange Rate Risk: The Role of Imported Input Prices (June 14, 2012). Available at SSRN: https://ssrn.com/abstract=2084190 or http://dx.doi.org/10.2139/ssrn.2084190

Dario Fauceglia

University of St. Gallen ( email )

Bodanstrasse 6
St. Gallen, 9000
Switzerland

Anirudh Shingal (Contact Author)

S.P. Jain Institute of Management & Research ( email )

Munshi Nagar, Dadabhai Road
Andheri West
Mumbai, Maharashtra 119579
India

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

Villa La Fonte, via delle Fontanelle 18
50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

University of Bern - World Trade Institute ( email )

Hallerstrasse 6/8
Bern, 3012
Switzerland

HOME PAGE: http://www.nccr-trade.org

Martin Wermelinger

University of St. Gallen ( email )

Bodanstrasse 6
St. Gallen, 9000
Switzerland

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