Authors : Kyungmin Kim(the Bank of Korea)

Abstract

The role of imported inputs in production process has become important owing to international vertical specialization. As a result, much attention has been drawn to the impact of changes in imported input costs caused by exchange rate fluctuations on the production costs and the prices of export goods. This paper examines how the cost-effect through exchange rate driven adjustments of imported input prices affects the price setting of Korean exporters using input-output tables and export transactions data.
The main results of this paper are as follows. First, I calculate imported input shares based on the basic sector classification of input-output tables and observe a considerable amount of heterogeneity. Second, export products with a high share of imported inputs have lower exchange rate pass-through due to offsetting exchange rate effects on their marginal costs. Third, while highly competitive products are set a higher export price, their pass-through effects are to be low as they can afford to absorb exchange rate shocks more effectively.
These results suggest that the effect of exchange rate shocks on Korea’s export prices may differ across export sectors due to the difference in imported input shares. Therefore, it is necessary to consider such microeconomic aspects when analyzing the impact of exchange rate shocks.