Many empirical studies show common empirical findings that the exchange rate pass-through to import prices in advanced countries declines in the 1990s. Some of those studies, however, draw contrasting conclusions regarding the factors behind such decline. Campa and Goldberg (2002) point out that such decline comes mainly from the decline in the import share of primary commodities, such as raw materials and fuels, while Otani, Shiratsuka, and Shirota (2003) make the case that such decline is mostly attributable to the decline in the exchange rate pass-through in each product category. In this paper, we empirically reexamine the validity of the contrasting hypotheses on the decline in the exchange rate pass-through. Our empirical results demonstrate that the decline in the exchange rate pass-through to Japan's import prices excluding primary commodities is largely attributable to the declines in the exchange rate pass-through in each product. Our empirical results also suggest the possibility that the declines in the long-term exchange rate pass-through to overall import prices are induced partly by the decline in the import share of primary commodities. The second point, however, should be taken cautiously, because the precision of the estimates is not high enough to draw a definite conclusion.
Keywords: Exchange rate pass-through, Pricing-to-market, Import structure, Expenditure-switching effect, Firms' sourcing decision.
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.