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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

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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
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:
DateEvent
February 2022Published
27 July 2021Modified
10 June 2021Available
6 April 2021Accepted
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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