Industry heterogeneity and exchange rate pass-through

In the presence of price rigidities, nominal exchange rate fluctuations can have real effects on the economy. External shocks may have differentiated effects across economic sectors depending on firms’ marginal cost structure and features of the demand they face, such as strategic complementarities. I analyze the relationship between the exchange rate pass-through into export and import prices and volumes and the use of imported inputs in production, an important determinant of marginal cost. Using microdata from Colombia, I show that manufacturing industries differ significantly in their use of imported inputs and in the estimated exchange rate pass-through. I find a clear correlation between the use of imported inputs and the response of prices to changes in exchange rates. That is, the exchange rate pass-through into prices tends to be larger for industries in which firms use a larger share of imported inputs. The link is stronger in the case of exports, but the effect on the pass-through into import prices is also positive. In contrast, I do not find a clear correlation between the use of imported inputs and the response of traded quantities to changes in exchange rates.