Exchange-rate pass-through: from the country to the product level

The incomplete pass-through phenomenon bears important macro-economic consequences for, e.g., the trade response to exchange rate changes, the symmetry of nominal exchange rate shocks, or the efficiency of monetary policy, and a number of papers try to estimate exchange-rate pass-through (ERPT) using macro or aggregate sectoral data. However, as incomplete pass-through is fundamentally the outcome of micro-economic behaviors, its empirical features should be studied at a highly disaggregated and bilateral level. Indeed, micro-based results are needed to understand the macro-based ERPT estimates, as these result from both a product-level ERPT and a composition effect. This paper uses a new database of bilateral international trade at the 6-digit level, offering a 1989-2003 time coverage, to investigate exchange-rate pass-through both at the country and product levels. The determinants of exchange-rate pass-through are investigated within a theoretical framework where oligopolistic competition is allowed for. Empirical estimates show that controlling for the market power of exporters (as suggested by the oligopolistic competition model) improves the quality of ERPT estimates