Abstract
This paper assesses the impact of globalization and regionalization on exchange rate pass-through (ERPT) into import prices in three core eurozone countries. To this end, we consider various indicators of globalization and rely on both aggregated (i.e., country level) and disaggregated (i.e., good level) data. Using quarterly data since 1992, we do not find compelling evidence that global factors cause a structural change in the degree of exchange rate pass-through. Indeed, increased trade openness or lower trade tariffs push up ERPT in some sectors, though results are quite sparse. However, regionalization, defined as a higher proportion of intra-EU imports’ share in total imports, reduces the pass-through in a more generalized way. Most importantly, we show that ERPT incompleteness generally observed in the literature is in appearance only and not at play when intra-EU trade is controlled for. Overall, our findings show that ERPT is complete and significant in numerous sectors, meaning that exchange rate changes still exert important pressure on domestic prices.
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Notes
- 1.
In addition, it is worth mentioning that a relatively low dispersion of ERPT levels is expected in the euro area, due to the convergence process implied by the monetary union [see, e.g., Ben Cheikh and Rault (2016)].
- 2.
To provide some figures, the degree of openness to trade in 2015 amounts at 61.4% for France, 86% for Germany, and 164.2% for Belgium; the mean value for the European monetary union being equal to 85% (source: World Bank; trade is the sum of exports and imports of goods and services measured as a share of gross domestic product).
- 3.
This indicator based on China is used by Marazzi et al. (2005) who show that Chinese booming exports to the United States play a role in explaining the low ERPT value in the U.S.
- 4.
Extra-EU refers to transactions with all the countries outside the EU, namely the rest of the world except the 28 EU member states.
- 5.
In particular, the industry evolution is more likely to be related to legal changes and natural factors rather than trade.
- 6.
For instance, Bernard et al. (2006) present evidence that companies adjust to increasing import pressure by changing their product-mix towards higher value-added goods, characterized by higher export potential and lower intensity of cost-based foreign competition. Moreover, low value-added goods are increasingly imported, in particular from low-wage countries.
- 7.
We use the applied tariff, which corresponds to the tariff that is actually charged on an import. The corresponding matchings are available upon request from the authors.
- 8.
Specifically, Eq. (1) is written as follows:
$$\begin{aligned} \Delta mp_{t}=\alpha + \sum _{j=1}^n\gamma _j \Delta mp_{t-j}+\rho \Delta y_{t}+\lambda \Delta mc^*_{t}+\theta \Delta e_{t}+ \delta DUM_t + \epsilon _{t} \end{aligned}$$(4)where \({\mathrm{DUMT}}_t\) is the dummy variable that takes the value of 1 for 2002Q1 and all subsequent periods, zero otherwise.
- 9.
Note that at the disaggregated level we use panel data techniques. The equations are then estimated by the GMM one-step estimator for each SITC sector and the panel members are the divisions in each Section.
- 10.
Indeed, working with overall unit value indices at a disaggregated level for the euro area countries, Campa et al. (2005) find an ERPT rarely higher than 60–70%.
- 11.
It is worth mentioning that the share of manufactured goods ranks at the first place in the import structure of Belgium (in 2015, source: Eurostat), highlighting the fact that a link may exist between ERPT degree and the structure of imports of the considered countries. This hypothesis is also supported by the fact that for Germany and France, high ERPT degrees are observed for industries belonging to SITC 8 and 7, which also play a key role in the import structure of these two countries.
- 12.
It is worth mentioning that the manufactured goods sector plays a key role in the Chinese economy since (i) it contributes, with the construction sector, nearly half of China’s GDP, and (ii) it is highly competitive and export-oriented.
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Acknowledgements
We would like to thank Anne-Laure Delatte and Sébastien Jean for helpful remarks and suggestions.
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López-Villavicencio, A., Mignon, V. (2021). On the Seemingly Incompleteness of Exchange Rate Pass-Through to Import Prices: Do Globalization and/or Regional Trade Matter?. In: Dufrénot, G., Matsuki, T. (eds) Recent Econometric Techniques for Macroeconomic and Financial Data. Dynamic Modeling and Econometrics in Economics and Finance, vol 27. Springer, Cham. https://doi.org/10.1007/978-3-030-54252-8_2
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