Exchange Rate Pass-Through into Export and Import Prices: A Bounds Testing Analysis on the Case of Korea

Abstract

This study empirically examines the nature of the exchange rate-pass through (ERPT) into export and import prices in the case of a small open economy of Korea by using a bounds testing approach. The estimation results obtained from the unrestricted error correction model (UECM) using data on Korea and its major trading partners, Japan and the U.S., provide new evidences showing that statistical significances in the degree of pass-through vary with respect to industries. The study also reveals that there is heterogeneity across sectors in their reaction to exchange rate as well as its asymmetry and persistence. The evidence indicate that the raw materials sector has a difference in the ERPT between the short and the long run effects, suggesting that the incomplete exchange rate pass-through seems to be persistent within the sector. In particular, the evidence for agriculture does support the hypothesis of asymmetric response to the ERPT in the long run. This result supports that of previous findings, but also provides more insight for the exchange rate theory and trade policy.