Exchange Rate Passthrough and PPP in Data

TL;DR

The data on exchange rate behavior has evolved over time, leading to key findings and insights in the literature.

Transcript

i'm gonna be talking about the data and and you know i have basically 10 minutes to to do this so it's obviously not going to be a literature review but i want to give you a sense on how the data has changed over time and particularly allowed us to find some key you know results in in this literature so the place to start is going to be the same th... Read More

Key Insights

• 👋 Variability in the real exchange rate mostly comes from the traded goods sector, challenging the assumption about non-traded goods.
• 💱 Price stickiness alone cannot fully explain exchange rate pass-through, and currency of invoicing also plays a significant role.
• 🔡 Large firms with high import shares have lower exchange rate pass-through, thanks to variable markups and offsetting effects from input costs.
• ☠️ Access to micro CPI and customs data has provided researchers with more detailed insights into exchange rate behavior.
• ☠️ Retail-level data on prices and distribution margins have further contributed to understanding exchange rate pass-through.
• ☠️ The evolution of data has allowed for testing different mechanisms and uncovering new aspects of exchange rate dynamics.

Questions & Answers

Q: What was the main finding in Engel's paper on real exchange rate behavior?

Engel showed that the majority of the variability in the real exchange rate came from the traded goods sector, contradicting the assumption that it primarily came from the non-traded goods sector.

Q: How did access to micro CPI data change the understanding of exchange rate pass-through?

Micro CPI data revealed that even at the time of a price change, exchange rate pass-through was low, indicating that price stickiness alone couldn't explain the behavior. Other factors, such as currency of invoicing, also played a role.

Q: What did the research on Belgian exporters reveal about exchange rate pass-through?

The research showed that large firms with high import shares had lower exchange rate pass-through. Variable markups and offsetting effects from input costs were identified as mechanisms behind this behavior.

Q: How did the study by Goldberg and Kampa contribute to understanding exchange rate pass-through?

Goldberg and Kampa found that taking into account distribution margins reduced CPI pass-through by one-third. They also highlighted the role of imported inputs in distribution services, which could enhance the impact of exchange rate shocks on pass-through.

Summary & Key Takeaways

• The initial research focused on decomposing the real exchange rate into trade-related and non-trade-related components, revealing that variability in the real exchange rate mostly comes from the traded goods sector.

• Access to micro CPI data allowed researchers to find that price stickiness was not the sole driver of exchange rate pass-through, and that currency of invoicing also played a significant role.

• Detailed customs data on Belgian exporters showed that large firms with high import shares had lower exchange rate pass-through, indicating the presence of variable markups and offsetting effects from input costs.