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Vehicle currency pricing and exchange rate pass-through
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Chen, Natalie, Chung, Wanyu and Novy, Dennis (2022) Vehicle currency pricing and exchange rate pass-through. Journal of European Economic Association, 20 (1). pp. 312-351. doi:10.1093/jeea/jvab025 ISSN 1542-4766.
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Official URL: https://doi.org/10.1093/jeea/jvab025
Abstract
Using detailed firm-level transactions data for UK imports, we find that invoicing in a vehicle currency is pervasive, with more than half of the transactions in our sample invoiced in neither sterling nor the exporter’s currency. We then study the relationship between invoicing currencies and the response of import unit values to exchange rate changes. We find that for transactions invoiced in a vehicle currency, import unit values are much more sensitive to changes in the vehicle currency than in the bilateral exchange rate. Pass-through therefore substantially increases once we account for vehicle currencies. This result helps to explain why UK inflation turned out higher than expected when sterling depreciated during the Great Recession and after the Brexit referendum. Finally, within a conceptual framework we show why bilateral exchange rates are not suitable for capturing exchange rate pass-through under vehicle currency pricing. Overall, our results help to clarify why the literature often finds a disconnect between exchange rates and prices when vehicle currencies are not accounted for.
| Item Type: | Journal Article | ||||||||||
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| Divisions: | Faculty of Social Sciences > Economics | ||||||||||
| Journal or Publication Title: | Journal of European Economic Association | ||||||||||
| Publisher: | Oxford University Press | ||||||||||
| ISSN: | 1542-4766 | ||||||||||
| Official Date: | February 2022 | ||||||||||
| Dates: |
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| Volume: | 20 | ||||||||||
| Number: | 1 | ||||||||||
| Page Range: | pp. 312-351 | ||||||||||
| DOI: | 10.1093/jeea/jvab025 | ||||||||||
| Status: | Peer Reviewed | ||||||||||
| Publication Status: | Published | ||||||||||
| Reuse Statement (publisher, data, author rights): | This is a pre-copyedited, author-produced version of an article accepted for publication in Journal of European Economic Association following peer review. The version of record Natalie Chen, Wanyu Chung, Dennis Novy, Vehicle Currency Pricing and Exchange Rate Pass-Through, Journal of the European Economic Association, 2021;, jvab025 is available online at: https://doi.org/10.1093/jeea/jvab025 | ||||||||||
| Access rights to Published version: | Restricted or Subscription Access | ||||||||||
| Date of first compliant deposit: | 16 April 2021 | ||||||||||
| Date of first compliant Open Access: | 10 June 2022 | ||||||||||
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