Discussion Paper Details

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Title: Vehicle Currency Pricing and Exchange Rate Pass-Through

Author(s): Natalie Chen, Wanyu Chung and Dennis Novy

Publication Date: July 2018

Keyword(s): CPI, Dollar, euro, exchange rate pass-through, inflation, Invoicing, Sterling, UK and Vehicle Currency Pricing

Programme Area(s): International Macroeconomics and Finance and International Trade and Regional Economics

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.

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Bibliographic Reference

Chen, N, Chung, W and Novy, D. 2018. 'Vehicle Currency Pricing and Exchange Rate Pass-Through'. London, Centre for Economic Policy Research.