Exchange-rate pass-through

Exchange-rate pass-through (ERPT) is a measure of how responsive international prices are to changes in exchange rates.

Formally, exchange-rate pass-through is the elasticity of local-currency import prices with respect to the local-currency price of foreign currency. It is often measured as the percentage change, in the local currency, of import prices resulting from a one percent change in the exchange rate between the exporting and importing countries. A change in import prices affects retail and consumer prices. When exchange-rate pass-through is greater, there is more transmission of inflation between countries. Exchange-rate pass-through is also related to the law of one price and purchasing power parity.

Suppose that the US imports widgets from the UK. The widgets cost $10 and £1 costs $1. Then the British Pound appreciates against the dollar and now £1 costs $1.50. Also suppose that the widgets now cost $12.5

There has been a 50% change in the exchange rate and a 25% change in price. The exchange rate pass-through is

For every 1% increase in the exchange rate, there has been a .5% increase in the price of the widgets.

The "standard pass-through regression" is

where ${\displaystyle p}$ is import price, ${\displaystyle e}$ is the exchange rate, ${\displaystyle c}$ is marginal costs, ${\displaystyle d}$ is demand, and ${\displaystyle \Delta }$ denotes a first difference. The exchange-rate pass-through after ${\displaystyle N}$ periods is

Campa and Goldberg (2005) estimated the long-run exchange-rate pass-through to import prices for the following countries, averaging across the countries from which imports came: