One sentence summary: Daily exchange rate pass-through (ERPT) into micro prices of Turkish agricultural products is about 5 percent, while less perishable products have higher ERPT of about 10 percent.
The
corresponding paper by Renzo Alvarez, Amin Shoja, Syed
Uddin and Hakan Yilmazkuday been published at Applied Economics Letters.
The working paper version is available here.
Abstract
This paper estimates the exchange rate pass-through (ERPT) by using good-level daily data on wholesale prices of imported agricultural products, where the identification is achieved by using daily data on the domestic inflation rate. The results of standard empirical analyses are in line with existing studies that employ lower frequencies of data by showing evidence for incomplete daily ERPT of about 5 percent. The key innovation is achieved when nonlinearities in ERPT are considered, where ERPT is doubled to about 10 percent when daily nominal exchange rate changes are above 0.55 percent, daily frequencies of price change are above 3.12 percent, and storage life of a product is above 10 weeks. Important policy implications follow.
Non-technical Summary
Exchange rate pass-through (ERPT) is the standard measure used to represent the relationship between nominal exchange rates (NER) and prices of internationally traded goods. Since central banks that have the objective of price stability can intervene the exchange rate market to have full or partial control over the value of their currency, policy makers need to know how prices would react to changes in NER. Such knowledge is also essential for individual welfare through income and substitution effects, especially for small-open economies.
Within this picture, we investigate ERPT at the product-level by introducing a new data set that has two main advantages over the ones employed in the existing literature. First, we have daily wholesale price data on 52 imported agricultural products that cover the period between January 2005 and August 2015 in Turkey; to our knowledge, this is one of the few rich data sets based on daily observations of micro prices. Second, we have the corresponding daily prices for domestically produced agricultural products as well, so that the pure effects of NER changes on prices can be identified with respect to other macroeconomic developments.
Having a daily (rather than a lower frequency) investigation is essential for understanding the dynamics in the import prices of agricultural goods, because the effects of NER changes can only be investigated in a high frequency setup due to the perishable nature of these products (e.g., having a storage life of one week for raspberry). We combine the daily import price data of agricultural products with the corresponding data on NER, frequency of price change (measured over the sample period, thanks to the micro-price nature of the data) and storage life (a concept corresponding to the opposite of perishability/depreciation) to estimate ERPT, where we consider potential nonlinearities through estimated thresholds in these variables.
The results provide evidence for incomplete daily ERPT of about 5 percent, on average across agricultural products. The key innovation is achieved when nonlinearities in ERPT are considered, where ERPT is doubled to about 10 percent when daily nominal exchange rate changes are above 0.55 percent, daily frequencies of price change are above 3.12 percent, and storage life of a product is above 10 weeks.
These results can be perceived as positive for Turkish policy makers, since low and incomplete pass-through as in this paper (i) ensures that NER shocks do not destabilize the price level and thus facilitates the prediction of future Turkish inflation, (ii) helps the stabilization of CPI inflation (targeting) rather than that of non-traded goods prices, and (iii) provides higher degrees of freedom to the monetary authority to conduct an independent policy, without having a trade-off between real stability and inflation stability, because high nominal exchange rate volatility is allowed to stabilize the real economy in face of external shocks.