Non-Linearities, Asymmetries and Dollar Currency Pricing in Exchange Rate Pass-through: Evidence from the Sectoral Level

39 Pages Posted: 18 Jun 2020

Date Written: June 5, 2020

Abstract

We investigate pass-through of exchange rate changes into UK import prices for 55 sectors using sector-specific exchange rate indices. Estimating a separate error correction model for each sector, we document substantial sectoral variation in pass-through, but find that compositional effects have not generated much variation in aggregate pass-through over time. Aggregating our sectoral results, we find that 74% of exchange rate changes are passed through to aggregate import prices in the long run. Pass-through is faster for larger exchange rate changes than smaller ones; and for movements driven by the US dollar than for broader based exchange rate changes. This greater sensitivity to the dollar exchange rate changes suggests the US dollar is used as a vehicle currency for invoicing some imports from non-US countries. We find no evidence of a comparable role for the euro nor for asymmetries in pass-through at the aggregate level.

Keywords: Exchange rate pass-through, import prices, vehicle currencies, non-linearities

JEL Classification: E31, E44

Suggested Citation

Hjortsoe, Ida and Lewis, John, Non-Linearities, Asymmetries and Dollar Currency Pricing in Exchange Rate Pass-through: Evidence from the Sectoral Level (June 5, 2020). Bank of England Working Paper No. 868, Available at SSRN: https://ssrn.com/abstract=3627715 or http://dx.doi.org/10.2139/ssrn.3627715

Ida Hjortsoe

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

John Lewis (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
11
Abstract Views
156
PlumX Metrics