Exchange Rate Pass-Through, Domestic Competition, and Inflation: Evidence from the 2005/08 Revaluation of the Renminbi

41 Pages Posted: 23 Jan 2015

See all articles by Raphael Auer

Raphael Auer

Swiss National Bank; Bank for International Settlements (BIS)

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Date Written: January 2015

Abstract

Import competition from China is pervasive in the sense that for many good categories, the competitive environment that US firms face in these markets is strongly driven by the prices of Chinese imports, and so is their pricing decision. This paper quantifies the effect of the government-controlled appreciation of the Chinese renminbi vis-à-vis the USD from 2005 to 2008 on the prices charged by US domestic producers. In a panel spanning the period from 1994 to 2010 and including up to 519 manufacturing sectors, import price changes of Chinese goods pass into US producer prices at an average rate of 0.7, while import price changes that can be traced back to exchange rate movements of other trade partners only have mild effects on US prices. Further analysis points to the importance of trade integration, variable markups, and demand complementarities on the one side, and to the importance of imported intermediate goods on the other side as drivers of these patterns. Simulations incorporating these microeconomic findings reveal that a substantial revaluation of the renminbi would result in a pronounced increase of aggregate US producer price inflation.

Keywords: China, exchange rate pass-through, inflation, monetary policy, price complementarities

JEL Classification: E31, E37, F11, F12, F14, F15, F16, F40, L16

Suggested Citation

Auer, Raphael, Exchange Rate Pass-Through, Domestic Competition, and Inflation: Evidence from the 2005/08 Revaluation of the Renminbi (January 2015). CEPR Discussion Paper No. DP10344, Available at SSRN: https://ssrn.com/abstract=2554418

Raphael Auer (Contact Author)

Swiss National Bank ( email )

Fraumuensterstr. 8
Zurich, 8022
Switzerland

Bank for International Settlements (BIS)

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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