Invoicing Currency and Symmetric Pass-Through of Exchange Rates and Tariffs : Evidence from Malawian Imports from the EU
The response of import prices to exchange rates can be used to predict the effect of changes in trade policy. The hypothesis of symmetric pass-through of tariffs and exchange rates asserts that the effect of tariffs and exchange rates on prices are...
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| Format: | Working Paper |
| Language: | English |
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World Bank, Washington, DC
2021
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| Online Access: | http://documents.worldbank.org/curated/en/454671615479048464/Invoicing-Currency-and-Symmetric-Pass-Through-of-Exchange-Rates-and-Tariffs-Evidence-from-Malawian-Imports-from-the-EU http://hdl.handle.net/10986/35286 |
| Summary: | The response of import prices to
exchange rates can be used to predict the effect of changes
in trade policy. The hypothesis of symmetric pass-through of
tariffs and exchange rates asserts that the effect of
tariffs and exchange rates on prices are identical. This
paper examines whether the symmetry hypothesis holds in the
context of invoicing currency, by investigating the role of
the euro and the U.S dollar currencies. The paper uses
transaction-level data of Malawian imports from the European
Union (EU) over a 12-year period, separating imports from
the Economic and Monetary Union (EMU) members and
non-members and across sectors. The findings show that the
dollar has the highest invoicing share, and the pass-through
rate of exchange rate and tariff shocks on to Malawian
consumers is high. Symmetry holds when bilateral exchange
rates are used, but when the invoicing currency is
considered there are deviations from symmetry. This result
implies that to predict the effects of trade policy based on
import prices' responses to the exchange rate,
bilateral exchange rates are not suitable for capturing
exchange rate and tariff pass-through. The variations in the
results across EMU and non-EMU, currencies, and industries
demonstrates that that empirical evidence is needed in each
case to understand the extent of pass-through, which is
crucial for import-dependent developing countries such as Malawi. |
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