Trade Invoicing Currency and First-stage Exchange Rate Pass-through

We use disaggregated trade data to estimate whether the currency in which imports are invoiced affects the pass-through of exchange rate changes to import prices. We estimate first-stage pass-through to be only around 14 per cent after two years for imports invoiced in Australian dollars, which is quantitatively important given that this accounts for about 30 per cent of imports. In contrast, first-stage pass-through for foreign currency-invoiced imports is immediate and complete. These results are likely to reflect foreign exporters with low desired pass-through choosing to invoice in Australian dollars. Our results have several important implications. First, Australian dollar invoicing dampens the response of importers' costs to exchange rate changes and so may make consumer price inflation less responsive to exchange rate changes, increasingly so if Australian dollar invoicing becomes more prevalent. Second, import price models that impose the law of one price are likely to be unsuitable, at least over relatively short-run periods. Third, invoice-share-weighted exchange rate indices should be preferable to trade-share-weighted exchange rate indices for modelling import price changes, although the empirical evidence on this is weak. Finally, exogenous changes in the exchange rate might have persistent effects on the goods terms of trade.