Vehicle currency pricing and exchange rate pass-through

Natalie Chen, Wanyu Chung and Dennis Novy

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 transactions in our sample invoiced in neither sterling nor the exporter's currency. We then study 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. Pass-through therefore substantially increases once we account for vehicle currencies. Our results help to explain the higher-than-expected pass-through into import prices during the Great Recession and after the EU referendum. Finally, within a theoretical framework we conceptualize an omitted variable bias arising in estimating pass-through with only bilateral exchange rates under vehicle currency pricing. Overall, our results contribute to understanding the disconnect between exchange rates and prices.

Keywords: CPI; dollar; Euro; exchange rate pass-through; inflation; invoicing; sterling; UK; vehicle currency pricing (search for similar items in EconPapers)
JEL-codes: F14 F31 F41 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2019-06-04
New Economics Papers: this item is included in nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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http://eprints.lse.ac.uk/102748/ Open access version. (application/pdf)

Related works:
Journal Article: Vehicle Currency Pricing and Exchange Rate Pass-Through (2022)
Working Paper: Vehicle currency pricing and exchange rate pass-through (2019)
Working Paper: Vehicle Currency Pricing and Exchange Rate Pass-Through (2019)
Working Paper: Vehicle Currency Pricing and Exchange Rate Pass-Through (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:102748

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