Working Paper: CEPR ID: DP13085
Authors: Natalie Chen; Wanyu Chung; Dennis Novy
Abstract: Using detailed firm-level transactions data for UK imports, this paper studies the relationship between invoicing currency choices and the response of import prices to exchange rate changes. We find that for transactions invoiced in a vehicle currency, import prices are much more sensitive to changes in the vehicle currency than in the bilateral exchange rate. Aggregate pass-through therefore substantially increases once we account for vehicle currencies. We also show how this translates into higher pass-through for UK consumer prices, in particular during the Great Recession and in the period following the Brexit referendum. Finally, we develop a theoretical framework to conceptualize exchange rate pass-through in the context of vehicle currency pricing. Overall, our results contribute to understanding the exchange rate disconnect puzzle, and have implications for the setting of monetary policy.
Keywords: CPI; Dollar; Euro; Exchange Rate Passthrough; Inflation; Invoicing; Sterling; UK; Vehicle Currency Pricing
JEL Codes: F14; F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Invoicing currency choices (F31) | Sensitivity of import prices to exchange rate changes (F31) |
| Bilateral exchange rates (F31) | Passthrough rates for goods priced in vehicle currencies (F31) |
| Vehicle currency pricing (R48) | Passthrough rates (H29) |
| Depreciation of sterling against US dollar (F31) | Domestic inflation (E31) |
| Depreciation of sterling against euro (F31) | Domestic inflation (E31) |