Import prices and invoice currency: evidence from Chile

Paper produced as part of the BIS Consultative Council for the Americas Research Network project "Exchange rates: key drivers and effects on inflation and trade"

Summary

Focus

We study the exchange rate pass-through to import prices at the dock using detailed customs data for Chile. We quantify the contribution of the invoice currency vis-à-vis the exporter's currency in determining the exchange rate pass-through at different time horizons.

Contribution

A depreciation of a country's currency results in more expensive imports, which ultimately trickles down to retail prices. This study is motivated by a related concern on the part of central banks, namely: what exchange rate parity is relevant to identify those inflation pressures going forward - the US dollar (USD) or that of the main trading partners? A characterisation of the exchange rate pass-through to import prices is a necessary step in addressing this question directly. The answer also helps shed light on other important aspects of international business cycles. For example, it helps us understand the implications of a global strengthening of the USD for international trade flows and economic activity.

Findings

We find that import prices are sensitive to changes in the value of the USD in the short run, but the exporter currency matters more in the medium term. Specifically, a depreciation of the domestic currency against the USD immediately increases the price of imports in Chilean pesos. This is due to the fact that a large majority of Chilean imports are invoiced in USD regardless of their origin - something we document in our work. With time, as new trade contracts are signed, prices in USD are adjusted to reflect the new conditions, easing the initial pressures on import prices. Within two years, the exchange rate parity with respect to the country of origin of imports gains relevance in determining import prices. Among other things, this implies that a global appreciation of the USD has inflationary pressures in the short run, but that multilateral depreciations matter most within a two-year horizon.

Abstract

We use transaction-level customs data to document that a large majority of Chilean imports are invoiced in dollars regardless of country of origin and sector. We study the implications of this fact for the determination of exchange rate pass-through (ERPT) to border prices. We find that the special role of the dollar in international trade has real effects, but bilateral exchange rates with respect to exporter currencies also matter in the medium-term. In particular, exchange rate fluctuations against the dollar account for most of the ERPT in the short run and are still relevant after two years. However, the cumulative ERPT with respect to the exporter country's currency increases with time and after two years accounts for most of the ERPT to border prices.

JEL classification: F3, F4

Keywords: invoice currency, exchange rate pass-through