Asymmetries and Non-linearities in Exchange Rate Pass-through
AbstractHow exchange rate changes pass-through into import prices is crucial for understanding both inflation at an aggregate level and the nature of firm competition and demand at a micro level. While the literature typically assumes exchange rate appreciations and depreciations pass through symmetrically, we show that dollar appreciations pass through more quickly and completely than dollar depreciations using product-level microdata of U.S. import prices collected by the BLS.
This asymmetry toward faster pass-through of dollar appreciations is more evident among differentiated goods closer to the consumer. Theoretically, this could reflect differences in pricing power, the shape of consumer demand, or the cost structure faced by firms. But it could also represent asymmetric price stickiness. We find that this is not the case. Indeed, we show that dollar appreciations are more likely to induce a price change than depreciations, despite the slower pass-through.
Sufficiently strong selective exit could also generate the observed asymmetry. Dollar depreciations are a negative shock for foreign exporters and could induce them to exit the U.S. market. The lack of a recorded price would bias pass-through towards zero. When focusing on those exits most likely to be endogenous, we find that dollar appreciations do not significantly raise the probability of exit compared to depreciations.
We outline a model of capacity constraints that is broadly consistent with our empirical findings. The model's key ingredients include: (1) Strategic complementarities that reduce pass-through in the short and long-run; (2) A capacity constraint that leads to temporarily lower pass-through for dollar (local) appreciations relative to depreciations; and (3) Sticky prices that further slow the price adjustment process, in combination with (1) and (2).