Pass-Through Estimates and the Choice of an Exchange Rate Index
GEP Working Paper No. 03/12
43 Pages Posted: 14 Jul 2003
Date Written: May 2003
This paper examines exchange rate pass-through into U.S. import prices in 29 manufacturing industries focusing on the choice of the exchange rate index. We create eight different exchange rate indexes. These vary by the number of countries whose currencies are included, whether the weight given to each currency is based on total trade with the United States or U.S. imports only, and whether the weights vary by industry. Our results support previous findings that pass-through is generally incomplete but varies across industries. Moreover, we find that pass-through estimates are sensitive to the choice of the exchange rate index. Using bootstrapped J tests we show that major currency indexes perform better than their broad currency counterparts. In addition, when using a major currency index, industry-specific exchange rate indexes are preferred to aggregate indexes.
Keywords: pass-though, index choice
JEL Classification: F14, F31
Suggested Citation: Suggested Citation