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Prices and Exchange Rates in Open Economies

Paper Session

Sunday, Jan. 7, 2018 10:15 AM - 12:15 PM

Pennsylvania Convention Center, 204-C
Hosted By: American Economic Association
  • Chair: Diego Perez, New York University

Price and Consumption Responses to Large Exchange Rate Shocks: Evidence from the 2015 Appreciation in Switzerland

Ariel Burstein
,
University of California-Los Angeles
Sarah Lein
,
University of Basel
Raphael Auer
,
Bank for International Settlements

Abstract

The removal of the lower bound on the CHF/EUR nominal exchange rate in January 2015 provides a unique setting to study the implications of a large, sudden and arguably exogenous appreciation of the nominal exchange rate. Using retail prices from a homescan data of individual consumer goods and the microdata underlying the import price index, we measure the response of border and consumer prices to the CHF appreciation, and how household expenditures responded to these price changes. Our main findings are: (i) changes in the wedge between import prices at the border and retail level account for a significant portion of incomplete exchange-rate pass-through at the consumer level; (ii) cross-section variation in border price changes induced by variation in the currency of invoicing at the border have a significant impact on consumer prices as well as expenditures at the consumer level, and (iii) while the frequency of import price reductions rises, the average size of these price reductions falls in the aftermath of the appreciation (consistent with a s-S pricing model with fat-tailed distributed shocks), contributing to low aggregate import-price pass-through.

Exchange Rate Puzzles: Evidence From Rigidly Fixed Nominal Exchange Rate Systems

Charles Engel
,
University of Wisconsin
Feng Zhu
,
Bank for International Settlements

Abstract

The literature has identified several major “exchange rate puzzles” – involving the volatility and persistence of real exchange rates, the relationship between exchange rates and interest rates, aggregate consumption and productivity. We examine the behaviour of real exchange rates among pairs of economies that have rigidly fixed nominal exchange rates, such as countries within the euro area, regions in China and Canada, and Hong Kong vis-à-vis the United States. Preliminary evidence focusing on euro area economies, China, and a number of non-euro area OECD economies suggests that some of these puzzles are less “puzzling” under a rigidly fixed exchange rate regime. For instance, real exchange rates appear to have no or less “excess volatility” and less excess response to the real interest rate differential for fixed-rate country pairs. In addition, consumption correlation turns out to be more consistent with predictions from economic theory in the economies with a rigidly fixed exchange rate. On the other hand, real exchange rates also seem to have greater persistence. These results may have implications for exchange rate modelling.

Real Exchange Rate Behavior: New Evidence from Matched Retail Goods

Alberto Cavallo
,
Massachusetts Institute of Technology
Brent Neiman
,
University of Chicago

Abstract

We use a dataset containing daily prices for thousands of matched retail products in nine countries to study tradable-goods real exchange rates. Prices were collected from the websites of large multi-channel retailers and then carefully matched into narrowly-defined product categories, providing relative price levels data that collectively represent the bulk of expenditures on food, fuel, and consumer electronics in each country. Using bilateral results with the US, we show that relative prices in local currencies co-move closely with nominal exchange rates. Exchange-rate passthrough into relative prices is approximately 75%, compared to 30% with CPI data for the same countries and time periods. We decompose the di erence and show that the majority of the di erence -about 25 percentage points- comes from the use of closely-matched products. The rest of the gap owes about equally to the exclusion of non-tradable sub-categories and to our inclusion of entering and exiting goods. These results suggest that the retail prices for tradable goods can adjust quickly to nominal exchange rate movements and vice-versa, and have important implications for a vast literature that tries to characterize both the level and behavior of real exchange rates over time.

Pricing in Multiple Currencies in Domestic Markets

Andres Drenik
,
Columbia University
Diego Perez
,
New York University

Abstract

We document that in emerging economies a significant fraction of prices in domestic markets are set in dollars. The currency of prices is not homogeneous across goods. More expensive goods are more likely to be set in dollars and also take longer time to sell. We rationalize these facts using a model of price setting in multiple currencies with search frictions. Pricing in dollars prevents erosion of real prices caused by inflation at the expense of a lower willingness to pay from buyers. When goods take longer to sell the relative value of preventing price erosion is higher. Consistent with empirical evidence, our model predicts that the share of prices in foreign currency increases when domestic inflation is high.
Discussant(s)
David William Berger
,
Northwestern University
Javier Cravino
,
University of Michigan
George Alessandria
,
University of Rochester
Federico Mandelman
,
Federal Reserve Bank of Atlanta
JEL Classifications
  • E3 - Prices, Business Fluctuations, and Cycles
  • F4 - Macroeconomic Aspects of International Trade and Finance