Abstract
The degree of exchange rate pass-through is of paramount importance to small and open economies as it has a direct impact on domestic inflation as well as the effectiveness of exchange rate as an adjustment tool. High exchange rate pass-through (ERPT) is often cited as a reason for a “fear of floating”. This article analyzes the degree of ERPT into the export prices of three Asian economies—Korea, Thailand and Singapore for the period 1980: Q1–2006: Q4 using both US dollar bilateral rates as well as nominal effective exchange rates. The study also examines whether there are asymmetries in ERPT between exchange rate appreciation and depreciation.
Notes
1. If exporters price their products in the destination market currency then they are said to engage in local currency pricing. In this situation exchanger rate changes have limited pass-through into destination market prices. This is separate from PTM. With firms engaging in such local currency pricing there could be low ERPT to the destination market currency, referred to as ‘‘exchange rate disconnect’’ (Devereux & Engel, Citation2001).
2. In a pioneering study, Athukorala (Citation1991) examined ERPT for selected Korean manufacturing exports over the period 1980: Q1–1989: Q1. Using a polynomial distributed lag model the author finds ERPT into foreign prices for the nominal effective exchange rate (NEER) to be around 28%.
3. The aggregate industrial production index for the 22 industrial countries is calculated as an average of the industrial or manufacturing production indices of the individual nations. The International Monetary Fund (IMF) uses a weighted geometric mean of the country indices to calculate this index. These 22 industrial nations are the USA, Canada, Australia, Japan, New Zealand, the Euro Area (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain), Denmark, Norway, Sweden, Switzerland, and the UK.
4. Stock and Watson (Citation1993) show that the DOLS is a robust methodology particularly for small samples as it allows for regressing variables which are stationary of different orders but are co-integrated. Moreover, by including the lagged and lead values of the changes in the regressors it corrects for potential simultaneity bias and small sample bias among the regressors.
5. The standard errors of the export price pass-through elasticity computed using the Delta method is given as .
6. Here again the standard errors for the export price ERPT elasticities are computed using the Delta method—
, where
is the derivative matrix of the coefficient of the different lags of the significant exchange rate term and
is the variance-covariance matrix of the regression.