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Incomplete Exchange Rate Pass-Through: Evidence from Exchange Rate Reform in China

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  • Yunong Li
  • Teng Zhang

Abstract

Exchange rate disconnect is one of the central puzzles in international macroeconomics. Recently, there is a growing literature that studies the microeconomic foundations or mechanisms for incomplete exchange rate pass-through. However, the estimations of the exchange rate pass-through vary widely in the existing literature. Our article proposes the use of a policy-based instrumental variable for exchange rate, exploiting the exchange rate reform in China, and finds that 67% of exchange rate pass-through into the FOB export price of Chinese exports. This contrasts to the almost full exchange rate pass-through using OLS estimation. We further find that the export price of homogeneous goods, low-technology goods, and goods supplied by domestic non-SOEs is more sensitive to exchange rate changes.

Suggested Citation

  • Yunong Li & Teng Zhang, 2018. "Incomplete Exchange Rate Pass-Through: Evidence from Exchange Rate Reform in China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(3), pages 690-706, February.
    • Handle: RePEc:mes:emfitr:v:54:y:2018:i:3:p:690-706
    DOI: 10.1080/1540496X.2016.1243940
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    Cited by:

    1. Yuwan Duan & Yanping Zhao & Jakob Haan, 2020. "Exchange Rate Pass-through in China: A Cost-Push Input-Output Price Model," Open Economies Review, Springer, vol. 31(3), pages 513-528, July.
    2. Thanh, Su Dinh & Canh, Nguyen Phuc & Doytch, Nadia, 2020. "Asymmetric effects of U.S. monetary policy on the U.S. bilateral trade deficit with China: A Markov switching ARDL model approach," The Journal of Economic Asymmetries, Elsevier, vol. 22(C).

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