Exchange rate pass-through in a small open economy: Panel evidence from Hong Kong

• Published in: International journal of finance and economics Vol. 8; no. 2; pp. 99 - 107
• Main Author: Parsley, David C.
• Format: Journal Article
• Language: English
• Published: Chichester, UK John Wiley & Sons, Ltd 01-04-2003; Wiley Periodicals Inc
• Subjects: Bias; Competition; Costs; Domestic markets; Elasticity of demand; Estimates; Exchange rate pass-through; Floating exchange rates; Foreign exchange rates; Imports; International trade; Prices; Studies; Wholesale Price Index-US; Hong Kong China; China
• ISSN: 1076-9307; 1099-1158
• DOI: 10.1002/ijfe.202

This paper presents estimates of exchange rate pass‐through derived from a panel of very disaggregated import unit‐values to Hong Kong. The estimation approach builds on that utilized by Knetter (1989, 1993) to study export pricing and pricing to market. The three‐dimensional data set examined comprises Hong Kong's top eight floating exchange rate trading partners, and twenty‐one of the top 5‐digit SITC imports since 1992. Pass‐through estimates for Hong Kong imply relatively faster import price adjustment than is typically found for larger, less open economies. These estimates are robust to a number of sensitivity tests. Finally these results confirm, from a different perspective, findings by Parsley (2001) that deviations from the law of one price play a relatively smaller role in real exchange rate movements for Hong Kong to be supplies than for other East Asian countries. Copyright © 2003 John Wiley & Sons, Ltd.