Linda S. Goldberg

Exchange Rate Pass-Through into Import Prices

We provide cross-country and time series evidence on the extent of exchange rate pass-through into the import prices of 23 OECD countries. We find compelling evidence of partial pass-through in the short run, especially within manufacturing industries. Over the long run, producer-currency pricing is more prevalent for many types of imported goods. Countries with higher rates of exchange rate volatility have higher pass-through elasticities, although macroeconomic variables have played a minor role in the evolution of pass-through elasticities over time. Far more important for pass-through changes in these countries have been the dramatic shifts in the composition of country import bundles.

Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?

Exchange rate regime optimality, as well as monetary policy effectiveness, depends on the tightness of the link between exchange rate movements and import prices. Recent debates hinge on whether producer-currency-pricing (PCP) or local currency pricing (LCP) of imports is more prevalent, and on whether exchange rate pass-through rates are endogenous to a countrys macroeconomic conditions. We provide cross-country and time series evidence on both of these issues for the imports of twenty-five OECD countries. Across the OECD and especially within manufacturing industries, there is compelling evidence of partial pass-through in the short-run- rejecting both PCP and LCP. Over the long run, PCP is more prevalent for many types of imported goods. Higher inflation and exchange rate volatility are weakly associated with higher pass-through of exchange rates into import prices. However, for OECD countries, the most important determinants of changes in pass-through over time are microeconomic and relate to the industry composition of a countrys import bundle.

Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty

Variable real exchange rates influence the location of production facilities chosen by a multinational. With risk averse investors and fixed productive factors, parent companies should not be indifferent to production location, even with identical expected costs of production across countries. If a nonnegative correlation exists between export demand and exchange rate shocks, the multinational optimally locates some productive capacity abroad. The capacity share abroad increases as exchange rate volatility rises and becomes more correlated with export demand shocks. These results are confirmed using quarterly U.S. bilateral foreign direct investment flows with Canada, Japan, and the United Kingdom. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Investment, Pass-Through and Exchange Rates: A Cross-Country Comparison

Although large changes in real exchange rates have occurred during the past decades, the real implications of these movements remain an empirical question. Using detailed data from the United States, Canada, the United Kingdom, and Japan we examine the implications of exchange rates for time series of sectoral investment. Both theoretically and empirically we show that investment responsiveness to exchange rates varies over time, positively in relation to sectoral reliance on export share and negatively with respect to imported inputs into production. The quantitative importance of each of these channels of exposure is a function of a set of exchange rate pass-through and demand elasticities. There exist important differences in investment endogeneity across high and low markup sectors, with investment in low markup sectors significantly more responsive to exchange rates. Unlike pass-through elasticities, which are viewed as industry-specific, investment endogeneity to exchange rates is a country-specific phenomenon.

Exchange Rates and Investment in United States Industry

The path of the dollar has significantly influenced investment activity in U.S. industry. The effects of both exchange-rate levels and exchange-rate volatility have been more pronounced in the 1980s than in the 1970s. Although aggregate investment data mask some of these relationships, the effects of exchange rates on investment are most pronounced in the disaggregate data for manufacturing durable goods sectors and nonmanufacturing sectors. These relationships also have changed over time. In contrast to the conventional wisdom, in the 1980s real dollar depreciations (appreciations) were likely to be associated with investment contractions (expansions). Copyright 1993 by MIT Press.

Liquidity Management of U.S. Global Banks: Internal Capital Markets in the Great Recession

The recent crisis highlighted the importance of globally active banks in linking markets. One channel for this linkage is the liquidity management of these banks, specifically the regular flow of funds between parent banks and their affiliates in diverse foreign markets. We use the Great Recession as an opportunity to identify the balance-sheet shocks to parent banks in the United States and then explore which features of foreign affiliates are associated with protecting, for example, their status as important locations in sourcing funding or as destinations for foreign investment activity. We show that distance from the parent organization plays a significant role in this allocation, where distance is bank-affiliate specific and depends on the location’s ex ante relative importance in local funding pools and overall foreign investment strategies. These flows are a form of global interdependence previously unexplored in the literature on international shock transmission.

Employment Versus Wage Adjustment and the U.S. Dollar

Using two decades of annual data, we explore the links between real exchange rates and employment, wages and overtime activity in specific U.S. manufacturing industries. Across two-digit industry levels of aggregation, exchange rate movements do not have large effects on numbers of jobs or on hours worked. More substantial effects are picked up in industry wages, especially for industries characterized by low price-over-cost markup ratios, and in overtime wages and overtime employment. The industry-by-industry pattern of wage responsiveness is not strongly related to industry export orientation or changes in overall external orientation. Industries with low price-over-cost markups and those with a less skilled workforce exhibit relatively larger employment elasticities but lower wage elasticities.

Predicting exchange rate crises: Mexico revisited

This paper predicts ex-ante the probability of currency crises end size of expected devaluations month by month for Mexico between 1980 and 1986 using a heterodox linear discrete time model of exchange rate crises. The forces contributing to speculative attacks on the Mexican peso include internal money creation, external credit shocks, and relative price shocks. The framework proves highly successful for generating forecasts of the probability of speculative attacks on the peso and for predicting lower bounds for post- collapse exchange rates using a range of assumptions about critical levels of central bank reserve floors. Simulation results suggest that reducing domestic credit growth, increasing the uncertainty surrounding this growth, and reducing the size and perhaps increasing the frequency of currency realignments might have greatly reduced the amount of currency speculation against the peso in some of the crisis periods between 1980 and 1986.

Does Foreign Ownership Contribute to Sounder Banks in Emerging Markets? The Latin American Experience

Foreign bank entrants into emerging markets are usually thought to improve the condition and performance of acquired institutions, and more generally to enhance local financial stability. We use bank-specific data for a range of Latin American countries since the mid-1990s to address elements of this claim. Across the seven largest countries, we find that the financial strength ratings of local banks acquired by foreign entities generally show a slight improvement relative to their domestic counterparts. Our more in-depth case studies of Chile, Colombia, and Argentina do not indicate striking differences in health between larger foreign and domestic retail-oriented banks (although state banks are noticeably weaker). However, foreign banks often have higher average loan growth, higher average provisioning expense, and greater loss-absorption capacity. These results suggest that foreign ownership may provide important positive influences on the stability and development of emerging market banking systems.

Exchange-Rate Pass-Through to Import Prices in the Euro Area

This paper presents an empirical analysis of transmission rates from exchange rate movements to import prices, across countries and product categories, in the euro area over the last fifteen years. Our results show that the transmission of exchange rate changes to import prices in the short run is high, although incomplete, and that it differs across industries and countries; in the long run, exchange rate pass-through is higher and close to one. We find no strong statistical evidence that the introduction of the euro caused a structural change in this transmission. Although estimated point elasticities seem to have declined since the introduction of the euro, we find little evidence of a structural break in the transmission of exchange rate movements except in the case of some manufacturing industries. And since the euro was introduced, industries producing differentiated goods have been more likely to experience reduced rates of exchange rate pass-through to import prices. Exchange rate changes continue to lead to large changes in import prices across euro-area countries.