Exchange-rate pass-through

Suppose that the US imports widgets from the UK. The widgets cost $10 and £1 costs $1. Then the British Pound appreciates against the dollar and now £1 costs $1.50. Also suppose that the widgets now cost $12.50.

There has been a 50% change in the exchange rate and a 25% change in price. The exchange rate pass-through is

${\displaystyle {\frac {25\%}{50\%}}=.5.}$

For every 1% increase in the exchange rate, there has been a .5% increase in the price of the widgets.

The "standard pass-through regression"[3] is

${\displaystyle \Delta \ln p_{t}=\alpha +\sum _{i=0}^{N}\gamma _{i}\Delta \ln e_{t-i}+\delta \Delta \ln c_{t}+\psi \Delta \ln d_{t}+\epsilon _{t},}$

where ${\displaystyle p}$ is import price, ${\displaystyle e}$ is the exchange rate, ${\displaystyle c}$ is marginal costs, ${\displaystyle d}$ is demand, and ${\displaystyle \Delta }$ denotes a first difference. The exchange-rate pass-through after ${\displaystyle N}$ periods is

${\displaystyle \sum _{i=0}^{N}\gamma _{i}.}$

Campa and Goldberg (2005) estimated the long-run exchange-rate pass-through to import prices for the following countries, averaging across the countries from which imports came:[2]

Measurement of exchange-rate pass-through is typically performed using aggregate price indexes.[1] Some studies have examined how firms in different industries or with different production costs differ in their responses to exchange rates. Studies of firm-level differences explain why exchange-rate pass-through is not equal to one[4] and how globalization caused a decrease in exchange-rate pass-through.[5]