Economic Papers Vol.5 No.2(6)
Group :
Data Source연구조정실 (Research Planning & Coordination Team(tel : 82-2-759-5407, fax:82-2-759-5410))
date2003.01.17
hit6749
- attachments
-
TITLE : [Economic Papers 5-2]
Invoice Currency and
Exchange Rate Pass-Through of Korean Exports: Theoretical Explanations
AUTHOR
: Seong-Hun Yun
CONTACT : Institute for Monetary & Economic
Research
(tel: 82-2-759-5407, 5421 fax: 82-2-759-5410)
ATTACH :
EP5-2-06.pdf
Summary:
Existing literature regarding the exchange rate
pass-through of Korean exports chose either the won/U.S. dollar (henceforth
dollar) exchange rate or the trade weighted exchange rate as an exchange rate
variable, when they estimated it. The estimated exchange rate pass-through was
much higher in the former case than that in the latter, which made it hard to
interpret the pricing behavior of Korean exporting firms whether it is producer
currency pricing or local currency pricing. This paper examines the validity of
the won/dollar exchange rate and the trade weighted exchange rate as the
exchange rate variable, considering most Korean exports are invoiced in
dollars.
When exports are denominated in dollars, the implications of
the won/dollar exchange rate and the trade weighted exchange rate as the
exchange rate variable are different. Use of the won/dollar exchange rate means
that the destination currency/dollar exchange rate is implicitly assumed to have
no effect on export prices, while use of the trade weighted exchange rate means
the won/dollar exchange rate is implicity assumed to have the same effects on
export prices in absolute values as the destination currency/dollar exchange
rate. However, these assumptions would be inappropriate if the dollar invoiced
imported inputs, non price discrimination in dollars across destination markets,
menu costs of invoice price changes, and different exchange rate expectations
play some roles in the process of export price determination. I provide four
theoretical explanations of why they may well be inappropriate.
If
this is indeed the case, as most exports are invoiced in dollars like Korean
exports, we should test the validity of both the won/dollar exchange rate and
the trade weighted exchange rate as the exchange rate variable by undertaking a
model selection procedure before estimating the exchange rate pass-through.