Exchange rates and prices: evidence from the 2015 Swiss franc appreciation

Summary

Focus

When the cap on the Swiss franc's exchange rate against the euro was removed in January 2015, an ideal opportunity arose to study the effects of a large and sudden currency appreciation on an otherwise stable macroeconomic environment. We use this case study to shed light on how currency shocks affect prices, and to illuminate the knock-on effects on consumer behaviour.

Contribution

Our main contribution is to trace how the exchange rate shock first affected import prices at the border and then retail prices, and how household spending responded to the resulting price changes. We combine data on invoicing currencies and wholesale prices at the Swiss-EU border with transaction-level information on prices and spending in stores. First, we quantify the sources of incomplete pass-through to consumer prices. Second, we investigate the impact of the appreciation on pass-through into border prices, and how it is related to invoicing. Third, we show how such border price changes pass through into the retail prices of imported goods, and ultimately, how retail price changes influenced household spending.

Findings

We find that border prices invoiced in Swiss francs fell on average by 5% in response to the roughly 15% appreciation of the Swiss franc against the euro by mid-2015, while the prices of euro-invoiced goods fell by 12%. Retail prices, which on average fell by only 1.3%, were in turn affected by changes in prices at the border: a 1 percentage point larger cut in import prices at the border resulted in a 0.3-0.4 percentage point larger price cut for imported products. These price changes induced households to buy more imported goods than Swiss-produced goods. We provide evidence that the currency of invoicing of border prices matters for the response of consumer prices and expenditures. Finally, we show that, while the prices of imported goods were cut more frequently in the aftermath of the appreciation, the cuts were, on average, smaller. This contributed to low pass-through into import prices.

Abstract

The removal of the lower bound on the EUR/CHF exchange rate in January 2015 provides a unique setting to study the implications of a large and sudden appreciation in an otherwise stable macroeconomic environment. Using transaction-level data on non-durable goods purchases by Swiss consumers, we measure the response of border and consumer retail prices to the CHF appreciation and how household expenditures responded to these price changes. Consumer prices of imported goods and of competing Swiss-produced goods fell by more in product categories with larger reductions in border prices and a lower share of CHF-invoiced border prices. These price changes resulted in substantial expenditure switching between imported and Swiss-produced goods. While the frequency of import retail price reductions rose in the aftermath of the appreciation, the average size of these price reductions fell (and more so in product categories with larger border price declines and a lower share of CHF-invoiced border prices), contributing to low pass-through into import prices.

JEL classification: D4, E31, E50, F31, F41, L11

Keywords: large exchange rate shocks, exchange rate pass-through, invoicing currency, expenditure switching, price-setting, nominal and real rigidities, monetary policy