New Working Paper Published on Exchange Rate Pass-through

The Treasury has published a Working Paper on exchange rate pass-through by New Zealand exporters.

Export performance, invoice currency, and heterogeneous exchange rate pass-through was written by Richard Fabling and Lynda Sanderson. It is being jointly published as a Reserve Bank Discussion Paper. This paper examines the extent to which New Zealand exporters maintain stable New Zealand dollar prices by passing on exchange rate changes to foreign customers.

It finds that the extent to which firms absorb exchange rate fluctuations in the short run is significantly related to both invoice currency choice and exporter characteristics when these are analysed separately. However, when jointly accounted for, the role of exporter characteristics largely disappears. That is, some firm types are more inclined to invoice in the New Zealand dollar, while others use either the importer currency or a third currency. In the short run, this translates into differences in exchange rate pass-through because of price rigidity in the invoice currency. Differences across invoice currencies diminish, but do not disappear, over time as prices adjust to reflect bilateral exchange rate movements.

The views, opinions, findings, and conclusions or recommendations expressed in Treasury Working Papers are strictly those of the authors and do necessarily reflect the views of the Treasury.

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