The pass-through of the koruna-dollar exchange rate to prices of tradable goods

The sharp depreciation of the euro against the dollar in late 2014 and early 2015 led the koruna to depreciate by as much as 28% against the US dollar (in April 2015). The concurrent rise in annual growth in prices of tradable goods (see Chart III.1.7) brought back to the fore the question of quantifying the pass-through of the koruna-dollar exchange rate to domestic inflation going beyond administered energy prices and fuel prices. For these prices, the effect of the koruna-dollar exchange rate is traditionally well mapped and routinely incorporated into the forecast.

This box therefore analyses the impact of the koruna-dollar exchange rate on prices of tradable goods as a component of adjusted inflation excluding fuels. Here, according to historical data, the effect of changes in the dollar’s exchange rate has empirically tended to be rather weak and volatile. The observed combination of depreciation of the koruna-dollar exchange rate and growth in prices of other tradables excluding fuels can be illustrated on the categories of clothing and footwear and electronics¹ (see Chart 1). In these categories, the estimated share of imports from dollar regions (see Table 1) is much higher than their estimated average share in total imports into the Czech Republic (20%–30% depending on the estimation method²). Chart 1 shows the concurrent weakening of the koruna-dollar rate and rise in prices of electronics and clothing and footwear. However, this positive correlation holds primarily in recent years and was previously not so apparent. In addition, it concerns only a limited part of the consumer basket (the electronics sub-index has a weight of 2.7% and the clothing and footwear sub-index another 3.3%, as compared to the total weight of tradables in adjusted inflation excluding fuels of 21.2%).

Table 1 (BOX) Estimated import shares in EUR and USD
Dollar regions have a weight of more than 50% in imports of electronics, clothing and footwear
(percentages; CNB estimate; 2014)

¹⁾ These estimates are based on the shares of imports from individual countries, for which the dominant currency denomination of contracts is determined by expert judgement.
²⁾ This category consists mainly of computers weighing up to 10 kg, televisions, telephones (including mobile phones) and domestic appliances.

Chart 1 (BOX) Prices of electronics and CZK/EUR and CZK/USD exchange rates
There is a clear correlation between the CZK/USD exchange rate and prices of electronics, clothing and footwear in recent years
(annual percentage changes; source: CZSO, CNB calculation)
 

An analysis of the behaviour of the tradables price index based on an empirical vector autoregression (VAR) model offers a more comprehensive view. The VAR model contains foreign and administered prices, the output gap, prices of other non-tradables and tradables within adjusted inflation excluding fuels and the koruna-dollar and koruna-euro exchange rates (all at monthly frequency). This ordering of the variables is used to identify structural shocks using the Cholesky decomposition. The estimate was performed on the logarithms of levels (with the exception of the output gap, which is in per cent). The impulse responses (see Chart 2) can thus be interpreted as the percentage response of prices of other tradables to a 1% shock to the relevant variable. The results reveal that the koruna-dollar rate passes through to tradables prices with a longer lag than the koruna-euro rate, with the statistically significant price impact occurring after roughly six months (see Chart 2). In addition, the intensity of the pass-through of the change in the koruna-dollar rate is roughly one-quarter of that in the koruna-euro rate.³

Chart 2 (BOX) Impulse responses of prices of tradables excluding fuels to exchange rate shocks
The pass-through of the CZK/USD rate to prices is roughly one-quarter of that of the CZK/EUR rate and moreover occurs with a longer lag
(percentage response of tradables prices to 1% shock to relevant variable; coloured area denotes 90% confidence interval; x-axis in months; CNB calculation)
 

As a result of the depreciation of the koruna-dollar exchange rate in late 2014 and early 2015, it can thus be expected that the effect on tradables prices within adjusted inflation excluding fuels will be roughly 1.5% (with a 0.3 percentage point impact on headline inflation). About half of this has already passed through to consumer prices, and the remainder will pass through in the coming quarters.

¹ Electronics comprises not only computer and audiovisual technology, but also large household appliances (“white goods”).

² Based on the geographical distribution of international trade, the share of imports from dollar regions is estimated at 30%. According to a 2014 study by Lai and Yu (“Invoicing Currency in International Trade: An Empirical Investigation and Some Implications for the Renminbi”) , the share is about 20%.

³ The other properties of the estimated model include a positive response of tradables prices to a shock to the output gap (peaking after about one year) and a negative response of tradables prices to a shock to administered prices, with the increase in regular household expenses leading via lower disposable income to downward pressure on prices of other tradables.