Exchange Rate Pass-through

Abstract

This article investigates the exchange rate pass-through for Indian export and import prices. A markup model for aggregate export/import prices is set up, and the analysis is carried out using Johansen–Juselius cointegration and error correction models. The evidence shows partial pass-through into export prices, but more than complete pass-through into import prices, with the long-run pass-through coefficients being larger than the short-run coefficients. Thus, the Indian exporter does appear to have a little bargaining power, but it is not so with the Indian importer. The results cast a question mark over the efficacy of exchange rate changes as a policy tool in correcting trade balances, and also point to the risk of imported inflation.

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