Exchange Rate Pass-Through into Export and Import Prices: Bounds Testing Analysis of 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, such as Korea, by using the 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 United States (U.S.), provide new evidence that statistical significances in the degree of pass-through vary with respect to industries. The study also reveals heterogeneity across sectors in their reaction to exchange rate as well as its asymmetry and persistence. The evidence indicates that in the raw materials sector, ERPT differs between the short- and the long-run effects, suggesting that the incomplete ERPT seems persistent within the sector. The evidence for agriculture supports the hypothesis of asymmetric response to ERPT in the long run. This result supports previous findings, and also provides more insight into the exchange rate theory and trade policy.