Two-sided Heterogeneity and Exchange Rate Pass-through, a paper co-authored by Wang Yaqi, a teacher from our school, Xu Jianwei, a teacher from Beijing Normal University, and Du Qingyuan, a teacher from Monash University, was published in the 2019 10th Issue of Economic Letters.
Relative changes in international prices usually reflect in part the movements of exchange rate, namely, the incomplete pass-through of exchange rate, which is one of the key subjects studied by international macroeconomics. Most of existing studies adopt a straightforward assumption that exporters directly sell goods to consumers in foreign markets (Burstein and Gopinath, 2014). But in reality, most exporters come into touch with final consumers through import middlemen. Therefore, the bargaining process between exporters and importers is key to understanding exchange rate pass-through. The research conducted by Goldberg and Tille (2013) was the first paper that made theoretical analysis of how the relationship between importers and exporters affect exchange rate pass-through. Their research result shows that big importers/exporters have a relatively high bargaining power, whereas relatively big importers (exporters) are usually associated with relatively low (high) trading prices and relatively high (low) exchange rate pass-through. Based on previous researches, this paper tries to explain the relationship between importers/exporters and exchange rate pass-through by studying the characteristics of importers/exporters, esp. their bargaining power.
It uses a Colombian exporter–importer matched data set to study the bargaining power of importers/exporters, and its effect on exchange rate pass-through. This data set covers the annual information about Colombian exporters and importers. The result shows that an average 1% depreciation of the Colombian peso would result in a 0.54% rise in import prices, which conforms with the theory of incomplete pass-through of exchange rate. Moreover, when the relative bargaining power of importers increased from under 10% to over 90%, exchange rate pass-through grew by over 5 percentage points. This indicates that the bargaining power of importers/exporters has a significant effect on exchange rate pass-through.
The study stated in this paper has important implications. First, it is the first to study exchange rate pass-through from the perspective of relative bargaining power between exporters and importers. Second, by looking into the relative effect of exporters/importers on exchange rate pass-through, it provides empirical evidence to the research conducted by Goldberg and Tille (2013). If an importer has a greater bargaining power than its trading partner, the efficiency of exchange rate pass-through will be higher. In addition, the paper considers the bargaining power of importers and exporters respectively, and finds that the role played by importers in exchange rate pass-through is at least as important as that played exporters.
