Testing for complete pass-through of exchange rate without trade barriers
Abstract
The objective of this paper is to test whether the complete pass-through of exchange rate exists when there are almost no transaction costs and in the environment of competitive market. In general, the literature claims that the pass-through of exchange rate is incomplete due to imperfect market, i.e. the presence of transaction costs and imperfect competition. The quasi-experimental case of the food import to Hong Kong from Mainland China is considered in the analysis. The results show that the pass-through of the exchange rate of Chinese RMB against to US dollar to Hong Kong’s food import price is complete in long-run equilibrium. Besides, the short-run adjustment significantly contributes to correcting the deviation from the long-run pass-through effect. Moreover, the complete pass-through still exists after accounting for the effects of asymmetry and volatility. Therefore, this paper contributes to the literature by providing empirical evidence that the complete pass-through of exchange rate can exist in the real world.
Keyword : pass-through, exchange rate, RMB, quasi-experimental environment, error correction model, quantile regression
How to Cite
Zhang, T. ., Li , T. ., Baležentis, T. ., & Štreimikienė, D. . (2020). Testing for complete pass-through of exchange rate without trade barriers. Journal of Business Economics and Management, 21(2), 543-563. https://doi.org/10.3846/jbem.2020.12219
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Gervais, J. P., & Khraief, N. (2007). Is exchange rate pass-through in pork meat export prices constrained by the supply of live hogs? American Journal of Agricultural Economics, 89(4), 1058–1072. https://doi.org/10.1111/j.1467-8276.2007.01030.x
Goldberg, L. S. (2004). Industry-specific exchange rates for the United States. Economic Policy Review, 5, 1–16.
Goldberg, P. K., & Knetter, M. M. (1997). Goods prices and exchange rates: what have we learned? Journal of Economic Literature, 35(3), 1243–1272. https://doi.org/10.3386/w5862
Gopinath, G., Gourinchas, P. O., Hsieh, C. T., & Li, N. (2011). International prices, costs, and mark-up differences. American Economic Review, 101(6), 2450–2486. https://doi.org/10.1257/aer.101.6.2450
Hatzenbuehler, P. L., Abbott, P. C., & Foster, K. A. (2016). Agricultural commodity prices and exchange rates under structural change. Journal of Agricultural & Resource Economics, 41(2), 204–224.
Héricourt, J., & Poncet, S. (2013). Exchange rate volatility, financial constraints, and trade: Empirical evidence from Chinese firms. The World Bank Economic Review, 29(3), 550–578. https://doi.org/10.1596/1813-9450-6638
Hu, M., Li, Y., Yang, J., & Chao, C. C. (2016). Actual intervention and verbal intervention in the Chinese RMB exchange rate. International Review of Economics & Finance, 43, 499–508. https://doi.org/10.1016/j.iref.2016.01.011
Jacob, P., & Uusküla, L. (2019). Deep habits and exchange rate pass-through. Journal of Economic Dynamics and Control, 115, 67–89. https://doi.org/10.1016/j.jedc.2019.05.011
Josling, T., Anderson, K., Schmitz, A., & Tangermann, S. (2010). Understanding international trade in agricultural products: One hundred years of contributions by agricultural economists. American Journal of Agricultural Economics, 92(2), 424–446. https://doi.org/10.1093/ajae/aaq011
Kabundi, A., & Mbelu, A. (2018). Has the exchange rate pass‐through changed in South Africa? South African Journal of Economics, 86(3), 339–360. https://doi.org/10.1111/saje.12197
Kabundi, A., & Mlachila, M. (2019). The role of monetary policy credibility in explaining the decline in exchange rate pass-through in South Africa. Economic Modelling, 79, 173–185. https://doi.org/10.1016/j.econmod.2018.10.010
Kassi, D. F., Sun, G., Ding, N., Rathnayake, D. N., & Assamoi, G. R. (2019). Asymmetry in exchange rate pass-through to consumer prices: Evidence from emerging and developing Asian countries. Economic Analysis and Policy, 62, 357–372. https://doi.org/10.1016/j.eap.2018.09.013
Law, K. P. J., Satoh, E., & Yoshimi, T. (2018). Exchange rate pass-through at the individual product level: Implications for financial market integration. The North American Journal of Economics and Finance, 46, 261–271. https://doi.org/10.1016/j.najef.2018.04.011
Li, H., Ma, H., & Xu, Y. (2015). How do exchange rate movements affect Chinese exports? – A firm-level investigation. Journal of International Economics, 97(1), 148–161. https://doi.org/10.1016/j.jinteco.2015.04.006
Liefert, W. (2009). The transmission of exchange rate changes to agricultural prices (Economic Research Report No 76). United States Department of Agriculture.
Menon, J. (1995). Exchange rate pass‐through. Journal of Economic Surveys, 9(2), 197–231. https://doi.org/10.1111/j.1467-6419.1995.tb00114.x
Munir, K., & Ameer, A. (2018). Effect of economic growth, trade openness, urbanization, and technology on environment of Asian emerging economies. Management of Environmental Quality: An International Journal, 29(6), 1123–1134. https://doi.org/10.1108/MEQ-05-2018-0087
Nakamura, E., & Zerom, D. (2010). Accounting for incomplete pass-through. Review of Economic Studies, 77(3), 1192–1230. https://doi.org/10.1111/j.1467-937X.2009.589.x
Nguyen, T. N. A., & Sato, K. (2019). Invoice currency choice, nonlinearities and exchange rate passthrough. Applied Economics, 52(10), 1048–1069. https://doi.org/10.1080/00036846.2019.1650884
Obstfeld, M., & Rogoff, K. (2000). The six major puzzles in international macroeconomics: Is there a common cause? NBER Macroeconomics Annual, 15(1), 339–390. https://doi.org/10.1086/654423
Persyn, D., & Westerlund, J. (2008). Error-correction–based cointegration tests for panel data. The STATA Journal, 8(2), 232–241. https://doi.org/10.1177/1536867X0800800205
Rodrìguez-López, J. A. (2011). Prices and exchange rates: A theory of disconnect. Review of Economic Studies, 78(3), 1135–1177. https://doi.org/10.1093/restud/rdq031
Song, M., Zhu, S., Wang, J., & Zhao, J. (2020). Share green growth: Regional evaluation of green output performance in China. International Journal of Production Economics, 219, 152–163. https://doi.org/10.1016/j.ijpe.2019.05.012
Su, W., Wang, Y., Zhang, C., & Zeng, S. (2018). The economic effect of cross-border e-commerce technology shocks. Transformations in Business & Economics, 17(2B), 549–566.
Wang, S. J., & Wang, L. (2018). Study on the export effect of China’s outward foreign direct investmentan empirical research based on investment intensity and investment breadth. Transformations in Business & Economics, 17(3C), 379–395.
Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics, 69(6), 709–748. https://doi.org/10.1111/j.1468-0084.2007.00477.x
Xu, J., Du, Q., & Wang, Y. (2019). Two-sided heterogeneity and exchange rate pass-through. Economics Letters, 183, 108534. https://doi.org/10.1016/j.econlet.2019.108534
Yu, Y., & Xiao, L. (2017). To accomplish the unaccomplished reform: Lessons and options of RMB Exchange rate reform. China Economist, 12(3), 2.
Yue, Q., Zhang, X., & Xiang, H. (2018). Mixed oligopoly, foreign penetration, and environmental taxes. Chinese Journal of Population Resources and Environment, 16(1), 77–84. https://doi.org/10.1080/10042857.2017.1405513
Aron, J., Macdonald, R., & Muellbauer, J. (2014). Exchange rate pass-through in developing and emerging markets: A survey of conceptual, methodological and policy issues, and selected empirical findings. Journal of Development Studies, 50(1), 101–143. https://doi.org/10.1080/00220388.2013.847180
Auer, R. A., & Schoenle, R. S. (2016). Market structure and exchange rate pass-through. Journal of International Economics, 98, 60–77. https://doi.org/10.1016/j.jinteco.2015.10.003
Baltagi, B. (2008). Econometric analysis of panel data. John Wiley & Sons.
Binding, G., & Dibiasi, A. (2017). Exchange rate uncertainty and firm investment plans evidence from Swiss survey data. Journal of Macroeconomics, 51, 1–27. https://doi.org/10.1016/j.jmacro.2016.11.004
Brun-Aguerre, R., Fuertes, A. M., & Phylaktis, K. (2012). Country and time variation in import passthrough: What drives it? Journal of International Money & Finance, 31(4), 818–844. https://doi.org/10.1016/j.jimonfin.2012.01.009
Burstein, A., & Gopinath, G. (2014). International prices and exchange rates. Handbook of International Economics (Vol. 4, pp. 391–451). Elsevier B.V. https://doi.org/10.1016/B978-0-444-54314-1.00007-0
Bussiere, M. (2013). Exchange rate pass-through to trade prices: The role of nonlinearities and asymmetries. Oxford Bulletin of Economics and Statistics, 75(5), 731–758. https://doi.org/10.1111/j.1468-0084.2012.00711.x
Bussière, M., Chiaie, S. D., & Peltonen, T. A. (2014). Exchange rate pass-through in the global economy: The role of emerging market economies. IMF Economic Review, 62(1), 146–178. https://doi.org/10.1057/imfer.2014.5
Campa, J. M., & Goldberg, L. S. (2005). Exchange rate pass-through into import prices. Review of Economics and Statistics, 87(4), 679–690. https://doi.org/10.1162/003465305775098189
Chen, H., & Hu, W. (2019). Research on exchange rate pass‐through effect based on artificial intelligence approach. Concurrency and Computation: Practice and Experience, 31(9), e4986. https://doi.org/10.1002/cpe.4986
Chen, S. L., Jackson, J. D., Kim, H., & Resiandini, P. (2014). What drives commodity prices? American Journal of Agricultural Economics, 5(6), 1455–1468. https://doi.org/10.1093/ajae/aau014
Chen, Z., Devereux, M. B., & Lapham, B. (2017). The Canadian border and the US dollar: The impact of exchange rate changes on US retailers. Canadian Journal of Economics, 50(5), 1525–1555. https://doi.org/10.1111/caje.12306
Cooke, D. (2019). Consumer search, incomplete exchange rate pass-through, and optimal interest rate policy. Journal of Money, Credit and Banking, 51(2–3), 455–484. https://doi.org/10.1111/jmcb.12518
Corsetti, G., Dedola, L., & Leduc, S. (2008). High exchange-rate volatility and low pass-through. Journal of Monetary Economics, 55(6), 1113–1128. https://doi.org/10.1016/j.jmoneco.2008.05.013
Delatte, A. L., & López-Villavicencio, A. (2012). Asymmetric exchange rate pass-through: Evidence from major countries. Journal of Macroeconomics, 34(3), 833–844. https://doi.org/10.1016/j.jmacro.2012.03.003
Devereux, M. B., Dong, W., & Tomlin, B. (2017). Importers and exporters in exchange rate pass-through and currency invoicing. Journal of International Economics, 105(3), 187–204. https://doi.org/10.1016/j.jinteco.2016.12.011
Eichengreen, B., & Tong, H. (2015). Effects of renminbi appreciation on foreign firms: The role of processing exports. Journal of Development Economics, 116(4), 146–157. https://doi.org/10.1016/j.jdeveco.2015.04.004
Enders, A., Enders, Z., & Hoffmann, M. (2018). International financial market integration, asset compositions, and the falling exchange rate pass-through. Journal of International Economics, 110, 151–175. https://doi.org/10.1016/j.jinteco.2017.11.002
Fendoğlu, S., Çolak, M. S., & Hacıhasanoğlu, Y. S. (2019). Foreign-currency debt and the exchange rate pass-through. Applied Economics Letters, 1–10. https://doi.org/10.1080/13504851.2019.1644423
Frankel, J., Parsley, D., & Wei, S. J. (2012). Slow pass-through around the world: A new import for developing countries? Open Economies Review, 23(2), 213–251. https://doi.org/10.1007/s11079-011-9210-8
Gaulier, G., Lahrèche-Révil, A., & Méjean, I. (2008). Exchange-rate pass-through at the product level. Canadian Journal of Economics, 41(2), 425–449. https://doi.org/10.1111/j.1365-2966.2008.00469.x
Gervais, J. P., & Khraief, N. (2007). Is exchange rate pass-through in pork meat export prices constrained by the supply of live hogs? American Journal of Agricultural Economics, 89(4), 1058–1072. https://doi.org/10.1111/j.1467-8276.2007.01030.x
Goldberg, L. S. (2004). Industry-specific exchange rates for the United States. Economic Policy Review, 5, 1–16.
Goldberg, P. K., & Knetter, M. M. (1997). Goods prices and exchange rates: what have we learned? Journal of Economic Literature, 35(3), 1243–1272. https://doi.org/10.3386/w5862
Gopinath, G., Gourinchas, P. O., Hsieh, C. T., & Li, N. (2011). International prices, costs, and mark-up differences. American Economic Review, 101(6), 2450–2486. https://doi.org/10.1257/aer.101.6.2450
Hatzenbuehler, P. L., Abbott, P. C., & Foster, K. A. (2016). Agricultural commodity prices and exchange rates under structural change. Journal of Agricultural & Resource Economics, 41(2), 204–224.
Héricourt, J., & Poncet, S. (2013). Exchange rate volatility, financial constraints, and trade: Empirical evidence from Chinese firms. The World Bank Economic Review, 29(3), 550–578. https://doi.org/10.1596/1813-9450-6638
Hu, M., Li, Y., Yang, J., & Chao, C. C. (2016). Actual intervention and verbal intervention in the Chinese RMB exchange rate. International Review of Economics & Finance, 43, 499–508. https://doi.org/10.1016/j.iref.2016.01.011
Jacob, P., & Uusküla, L. (2019). Deep habits and exchange rate pass-through. Journal of Economic Dynamics and Control, 115, 67–89. https://doi.org/10.1016/j.jedc.2019.05.011
Josling, T., Anderson, K., Schmitz, A., & Tangermann, S. (2010). Understanding international trade in agricultural products: One hundred years of contributions by agricultural economists. American Journal of Agricultural Economics, 92(2), 424–446. https://doi.org/10.1093/ajae/aaq011
Kabundi, A., & Mbelu, A. (2018). Has the exchange rate pass‐through changed in South Africa? South African Journal of Economics, 86(3), 339–360. https://doi.org/10.1111/saje.12197
Kabundi, A., & Mlachila, M. (2019). The role of monetary policy credibility in explaining the decline in exchange rate pass-through in South Africa. Economic Modelling, 79, 173–185. https://doi.org/10.1016/j.econmod.2018.10.010
Kassi, D. F., Sun, G., Ding, N., Rathnayake, D. N., & Assamoi, G. R. (2019). Asymmetry in exchange rate pass-through to consumer prices: Evidence from emerging and developing Asian countries. Economic Analysis and Policy, 62, 357–372. https://doi.org/10.1016/j.eap.2018.09.013
Law, K. P. J., Satoh, E., & Yoshimi, T. (2018). Exchange rate pass-through at the individual product level: Implications for financial market integration. The North American Journal of Economics and Finance, 46, 261–271. https://doi.org/10.1016/j.najef.2018.04.011
Li, H., Ma, H., & Xu, Y. (2015). How do exchange rate movements affect Chinese exports? – A firm-level investigation. Journal of International Economics, 97(1), 148–161. https://doi.org/10.1016/j.jinteco.2015.04.006
Liefert, W. (2009). The transmission of exchange rate changes to agricultural prices (Economic Research Report No 76). United States Department of Agriculture.
Menon, J. (1995). Exchange rate pass‐through. Journal of Economic Surveys, 9(2), 197–231. https://doi.org/10.1111/j.1467-6419.1995.tb00114.x
Munir, K., & Ameer, A. (2018). Effect of economic growth, trade openness, urbanization, and technology on environment of Asian emerging economies. Management of Environmental Quality: An International Journal, 29(6), 1123–1134. https://doi.org/10.1108/MEQ-05-2018-0087
Nakamura, E., & Zerom, D. (2010). Accounting for incomplete pass-through. Review of Economic Studies, 77(3), 1192–1230. https://doi.org/10.1111/j.1467-937X.2009.589.x
Nguyen, T. N. A., & Sato, K. (2019). Invoice currency choice, nonlinearities and exchange rate passthrough. Applied Economics, 52(10), 1048–1069. https://doi.org/10.1080/00036846.2019.1650884
Obstfeld, M., & Rogoff, K. (2000). The six major puzzles in international macroeconomics: Is there a common cause? NBER Macroeconomics Annual, 15(1), 339–390. https://doi.org/10.1086/654423
Persyn, D., & Westerlund, J. (2008). Error-correction–based cointegration tests for panel data. The STATA Journal, 8(2), 232–241. https://doi.org/10.1177/1536867X0800800205
Rodrìguez-López, J. A. (2011). Prices and exchange rates: A theory of disconnect. Review of Economic Studies, 78(3), 1135–1177. https://doi.org/10.1093/restud/rdq031
Song, M., Zhu, S., Wang, J., & Zhao, J. (2020). Share green growth: Regional evaluation of green output performance in China. International Journal of Production Economics, 219, 152–163. https://doi.org/10.1016/j.ijpe.2019.05.012
Su, W., Wang, Y., Zhang, C., & Zeng, S. (2018). The economic effect of cross-border e-commerce technology shocks. Transformations in Business & Economics, 17(2B), 549–566.
Wang, S. J., & Wang, L. (2018). Study on the export effect of China’s outward foreign direct investmentan empirical research based on investment intensity and investment breadth. Transformations in Business & Economics, 17(3C), 379–395.
Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics, 69(6), 709–748. https://doi.org/10.1111/j.1468-0084.2007.00477.x
Xu, J., Du, Q., & Wang, Y. (2019). Two-sided heterogeneity and exchange rate pass-through. Economics Letters, 183, 108534. https://doi.org/10.1016/j.econlet.2019.108534
Yu, Y., & Xiao, L. (2017). To accomplish the unaccomplished reform: Lessons and options of RMB Exchange rate reform. China Economist, 12(3), 2.
Yue, Q., Zhang, X., & Xiang, H. (2018). Mixed oligopoly, foreign penetration, and environmental taxes. Chinese Journal of Population Resources and Environment, 16(1), 77–84. https://doi.org/10.1080/10042857.2017.1405513