Import Prices and Exchange Rate Pass-Through: Theory and Evidence from the United Kingdom

Bank of England Working Paper No. 182

30 Pages Posted: 3 Sep 2003

See all articles by Valerie Herzberg

Valerie Herzberg

Bank of England

George Kapetanios

King's College, London

Simon Price

Essex Business School; City University London - Department of Economics

Date Written: 2003

Abstract

The appreciation of sterling that began in 1996 appeared to pass through into import prices very slowly, an apparent example of incomplete exchange rate pass-through. Incomplete pass-through has typically been explained by a combination of sticky prices and pricing to market. This can have implications for the monetary transmission mechanism, making it important to establish whether this phenomenon exists in practice. One implication for firms' import (and domestic) price setting is that competitors' prices might affect the mark-up, although this is not a necessary condition. Some of the factors supporting pricing to market may also introduce non-linear responses to exchange rate shocks. It is established that a model of pricing to market including a role for competitors' prices fits the data, but no evidence of non-linearity is found.

Keywords: Import prices, exchange rates, pass-through, thresholds

JEL Classification: D43, F12, F41

Suggested Citation

Herzberg, Valerie and Kapetanios, George and Price, Simon G., Import Prices and Exchange Rate Pass-Through: Theory and Evidence from the United Kingdom (2003). Bank of England Working Paper No. 182, Available at SSRN: https://ssrn.com/abstract=425783 or http://dx.doi.org/10.2139/ssrn.425783

Valerie Herzberg (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

George Kapetanios

King's College, London ( email )

30 Aldwych
London, WC2B 4BG
United Kingdom
+44 20 78484951 (Phone)

Simon G. Price

Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

City University London - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

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