International Economics 135-136 (2013) 29–46

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International Economics

journal homepage: www.elsevier.com/locate/inteco

Asymmetric effects of exchange rate variations:

An empirical analysis for four advanced countries
Hayet Jihene El bejaoui
CEPN, CNRS, University of Paris North, Av. JB Clément 93430 Villetaneuse, France

a r t i c l e in f o a b s t r a c t

Available online 14 October 2013 This paper investigates possible asymmetries in the reaction of
JEL classification: export and import prices to changes in the exchange rate for
C33 4 advanced countries between the 1981q1 and 2011q2 period.
E31 This exercise is conducted using an asymmetric cointegrating
F31 autoregressive distributed lag (ARDL) model, with positive and
negative partial sum decompositions of the nominal exchange
Keywords: rates. Our results show evidence of asymmetric ERPT to apprecia-
Exchange rate pass-through tions and depreciations, meaning that export and import prices
Asymmetry respond differently depending on the direction of the exchange
ARDL
rate variation. In particular, we find that appreciations are more
Export price
passed through to export and import prices than depreciations.
Import price
This result has important implications in terms of monetary policy.
& 2013 CEPII (Centre d’Etudes Prospectives et d’Informations
Internationales), a center for research and expertise on the world
economy. Published by Elsevier Ltd. All rights reserved.

1. Introduction

In open economies, studying the responses of prices due to exchange rate changes is of primary
importance. Indeed, exchange rate variations could significantly affect the level of inflation, especially
for countries with floating exchange rates regimes.
The degree of exchange rate pass-through (ERPT from now on), which is defined as degree of
sensitivity of import prices to a one percent change in the exchange rate of the importing nation’s
currency, is usually considered as one of the key determinants of monetary policy design. Indeed,
ERPT determines whether central banks should devote more efforts to control the nominal pressures

E-mail address: [email protected]

2110-7017/$ - see front matter & 2013 CEPII (Centre d’Etudes Prospectives et d’Informations Internationales), a center for research
and expertise on the world economy. Published by Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.inteco.2013.10.001
30 H.J. El bejaoui / International Economics 135-136 (2013) 29–46

that could compromise the stability of prices. Both the theoretical and the empirical literature (e.g.,
Flamini, 2007 and Adolfson, 2007) suggest that the characteristics of the pass-through may even affect
the choice of the measure of inflation targeted by the central bank: either the monetary authorities
target the inflation rate that involves exclusively locally produced goods or it focuses on total inflation
that includes imports prices.
The choice of an exchange rate regime for developing and emerging countries is an ongoing debate
in international finance. The type and the credibility of the policy regime can be a vital factor for ERPT.
For example, pass-through should be lower in countries with flexible exchange rate regimes than
in fixed exchange rate regimes. Indeed, in fixed regimes, the firms consider that a change in the
exchange rate is permanent and will have a permanent impact on their production costs. Therefore,
they adjust selling prices rapidly. In contrast, in flexible regimes, economic agents seem to consider
changes in the exchange rate as partially temporary. Hence, they do not adjust their selling prices
immediately.
ERPT is said to be full or complete when the effect of a depreciation (or an appreciation) is fully
reflected in import prices. However, if the import price rises less than proportionally to the exchange
rate variation, as the exporters absorb a proportion of the exchange rate change, then it is called
partial or incomplete pass-through. Whether full or partial, the pass-through is an important factor
that determines the extent to which exchange rate adjustments are able to provide or maintain a
stable external balance. Indeed, how exchange rate variations are transmitted into local-currency
prices is a primary channel through which currency fluctuations can impact trade volumes.
Over the past years, an extensive literature has been developed on exchange rate pass-through. For
instance, several empirical studies which evaluate the degree of the ERPT assume that the exchange
rate changes on export and import prices are symmetric (Froot and Klemperer, 1989; Dornbusch,
1987; Taylor, 2000; Devereux and Yetman, 2002, etc.). This assumption implies that an appreciation
of the exchange rate leads to a price change of the same magnitude than a depreciation. However,
several reasons may suggest that this is not the case. Indeed, firms can react differently to exchange
rates changes depending on the direction and the magnitude of these changes. For instance, exporters
in monopolistic situations may have more interest to pass through appreciations (i.e. to increase their
prices) than depreciations (i.e. to decrease prices), leading to an asymmetric ERPT. Moreover, in the
presence of menu cost or switching costs, exporters or importers may leave their price unchanged if
exchange rate changes are small, and change their prices only when the exchange rate change is above
a given threshold. With switching costs, exporters can keep their prices unchanged in their currency
as long as the price of their goods in local currency does not vary beyond a given limit. This implies
that the exchange rate pass-through can be symmetric but nonlinear.
The empirical literature has paid little attention to the issue of asymmetries in ERPT, despite the
importance of this assumption for monetary authorities. The number of studies that considers the
possibility of nonlinear or asymmetric responses is relatively scarce.1 However, there are some studies
that indicate that this is an important extension to be studied (Marston, 1990; Goldberg and Knetter,
1997; Pollard and Coughlin, 2004; Yang, 2007; Bussière, 2007; Delatte and Lopez-Villavcencio, 2012).
Asymmetry of ERPT implies that prices react differently to an exchange rate change (appreciation
or depreciation). Asymmetry may occur in the long-run relationship, in the short-run dynamics
or both. This asymmetry is often explained by price rigidities (especially downward rigidities).
In particular, the presence of price rigidities allows to differentiate short-run from long-run effects of
marginal-cost shocks on prices. When the degree of price rigidity is high, the pass-through in the
short-run is smaller. On the contrary, in the long-run the pass-through is supposed to be complete.
The objective of this paper is to analyze if exchange rate pass-through to export and import prices
is symmetric, as commonly assumed in the empirical literature or if, on the contrary, prices react
differently to a positive or a negative exchange rate variation. Our analysis is conducted for four

1
We make the distinction between nonlinear and asymmetric ERPT. Nonlinear ERPT implies that small exchange rate
variations do not affect prices. However, once the variation is high enough, prices indeed respond to exchange rate movements.
Our study focuses on the asymmetric ERPT.
 H.J. El bejaoui / International Economics 135-136 (2013) 29–46 31

advanced countries, namely Japan, Germany, France and the United-States for the 1981q1–2011q2
period.
To this end, we rely on asymmetric cointegration techniques which are based on autoregressive
distributed lag (ARDL) models. This methodology, developed by Pesaran et al., 2001, allows us to test
the existence of a long-term or levels relationship. Moreover, it has two major advantages over the
approach of Johansen and Juselius (1990). The first one is that this approach is applicable even if the
variables are stationary or integrated or mutually cointegrated. It does not require that the series are
integrated in the same order to find a possible long-run relationship between these variables. The
second advantage is that this method has better statistical properties in small samples. Moreover, its
asymmetric extension, proposed by Shin et al. (2009), enables to test whether there is an asymmetry
in the short-run, in the long-run or both.
To our knowledge, only the study of Delatte and Lopez-Villavcencio (2012) found an asymmetric
ERPT using autoregressive distributed lag (ARDL) models, but they focused on inflation rather than
export and import prices.
The findings of this study can be summarized into three elements. First, the exchange rate pass-
through can be asymmetric. We provide evidence that export and import prices respond differently
depending on the direction of the exchange rate variation. Secondly, we find that the appreciation of
the exporter’s currency would decrease export prices. Finally, in the long-run, an appreciation is more
passed through to export and import prices than depreciations.
This paper is structured as follows: Section 2 presents the main determinants of pass-through
and reviews the main arguments for the incomplete and declining ERPT. Section 3 provides some
arguments that justify why the ERPT can be asymmetric. Section 4 describes the methodology. Section
5 is devoted to describe the data and the results. Finally, Section 6 contains our main conclusions.

2.1. The determinants of the exchange rate pass-through

There is a vast literature presenting the factors that determine the extent of pass-through to prices.
Among these we find the size of the export market and the degree of competition in which the
exporter is faced in this market, the duration of the exchange rate variation, the direction or the
magnitude of the exchange rate changes and the degree of trade openness of a country.
With respect to the size of the export market and the degree of competition, the argument is as
follows. If the export market for the product is large and the local demand is very elastic, then in order
to maintain their market share, foreign firms have interest to absorb the variations in the exchange
rate and thus accept lower marginal profits, especially when the industry is highly competitive
(Campa and Goldberg, 2006). Indeed, when exporters are facing strong competition, this allows
consumers to have the choice, making them relatively price-sensitive. On the contrary, if exporters do
not face much competition for their products, then exporter prices may be somewhat less responsive
to exchange rate changes. In this case, pricing-to-market will be lower and the corresponding pass-
through will be higher.2
The duration of the exchange rate variations is also an important determinant of the extent of the
pass-through. For example, Meurers (2003) found that, in the long run, the pass-through tends to be
complete when the exchange rate shocks persist. Conversely, if the exchange rate changes are
temporary, then exporters may be more willing to lower their margins in order to keep their market
share during an appreciation.
There is also a literature that suggests that the response of exporters to exchange rate variations
may be asymmetric. More precisely, the ERPT would depend on the fact that the exchange rate
appreciates or depreciates (e.g., Ohno, 1989; Marston, 1990; Goldberg, 1995; Kadiyali, 1997; Pollard
and Coughlin (2004); Delatte and Lopez-Villavcencio, 2012). For example, when the exporter's
currency appreciates, they can decide to absorb the exchange rate variations in order to keep the price

2
For instance, exports to certain competitive industries in the US, such as cars and alcoholic beverages, showed relatively
high pricing-to-market and corresponding lower exchange rate pass-through as they try to preserve their market share
(Hooper and Mann (1989); Woo (1984); Knetter (1993)).
32 H.J. El bejaoui / International Economics 135-136 (2013) 29–46

of their products on the importer's currency stable and to maintain their market share (Goldberg
and Knetter, 1997). In this situation, exchange rate pass-through may be low or incomplete.
Conversely, if the exporter's currency depreciates, then exports become cheaper for the importing
market, which may encourage exporters to adopt a complete exchange rate pass-through. The fact
that ERPT is incomplete in case of appreciations but (almost) complete in case of depreciations implies
an asymmetric ERPT. This issue will be analyzed later.
The magnitude of the exchange rate changes is also important. When this magnitude is low,
exporters are generally willing to absorb this change and keep local prices unchanged due to costs
associated with changing prices (i.e. menu costs). Bussière (2007), for instance, finds that for a larger
appreciation, export prices decrease, whereas for a large depreciation they increase. Also, in case of
appreciations, exporters reduce their prices by a larger amount, because they fear losing market share.
The literature also points to the degree of trade openness of a country. The most expected relation
between the ERPT and this variable is positive. In this case, a high degree of openness can imply a high
sensitivity of the economy to exchange rates variations. In other words, the higher is the degree
of trade openness, the higher is the price responsiveness to exchange movements (McKinnon, 1963;
McCarthy, 2000, 2007). However, this result may be challenged once we take into account that
inflation could be negatively correlated with openness, as empirically found by Romer (1993). This
gives rise to an indirect channel, whereby openness is negatively correlated with inflation and, taking
into account Taylor’s hypothesis, the degree of pass-through. The direct and indirect channels go in
opposite directions and the overall sign of the correlation between pass-through and openness can
thus be either positive or negative (Ca’ Zorzi et al., 2007).

2.2. Incomplete and declining ERPT

Since the 1980s, an important empirical literature on exchange rate pass-through had emerged, with a
focusing on the relationship between the exchange rate and import prices. Measuring the pass-through is
the first step to perform. This literature had reached at least two consensuses. First, the ERPT is in the most
cases, incomplete. Second, the ERPT had declined in recent years. Afterwards, it has been measured over
the short-run and long-run. Indeed, the extent of pass-through both in short and long-run is therefore
important to understand the impact of exchange rate movements on prices. The short-run estimate is
based on how quarterly prices change owing to the average exchange rate of that quarter. Whereas the
long-run estimate includes pass-through due to the quarter-of exchange rate as well as quarterly lags of
the exchange rate. For instance, Campa and Goldberg (2005) measured both short and long-run pass-
through. They found that the degree of pass-through is lower in the long-run than in the short-run.
Regarding the theoretical propositions for an incomplete pass-through, Krugman (1987) and Dornbusch
(1987) justify it as arising from firms operating in a market characterized by imperfect competition. The
argument is that firms adjust their mark-ups in response to exchange rate shocks. In particular, if the firm’s
mark-up decreases as the price of the good it sells increases, the pass-through is incomplete.
According to the literature, there are at least three explanations for oligopolistic firms acting in this
way. First, this action might be a defensive response to perceived temporary currency movements
(Marston, 1990). Second, it might result from market share considerations (e.g., Hooper and Mann
(1989), Kasa (1992) or Froot and Klemperer (1989)). Finally, Ihrig et al. (2006) suggest that a firm can
only dampen the impact of exchange rate movements on its price while its mark-up is positive. In
another vein, incomplete pass-through can also arise from local currency pricing (i.e. when the
exporting firm set prices in the currency of the country to which it exports). Indeed, Devereux and
Engel (2001) and Bacchetta and Van Wincoop (2003) endogenize a firm's choice of invoicing currency
and argue that countries with low relative exchange rate variability or stable monetary policies are
more likely to have their currencies chosen for transaction invoicing, and hence more likely to have
low import-price pass-through.3 Bodnar, Dumas, and Marston (2002) show that the pass-through can

3
As noticed by Ihrig et al. (2006) a problem with the local currency pricing hypothesis is that while in the medium-term a
firm may choose to invoice in the currency of the destination market to shield the price paid by its clients from exchange-rate
 H.J. El bejaoui / International Economics 135-136 (2013) 29–46 33

be less than one if part of the costs of production is incurred in a different currency, if goods are highly
substitutable, or if the market share of the exporting firm in the foreign market is large.
Ihrig et al. (2006) list also cross-border production and exchange rate hedges as alternative
explanations for incomplete pass-through. In the first case, if production takes place in several stages
across many countries, then the costs of producing the final good is incurred in several currencies
(e.g. Aksoy and Riyanto, 2000; Bodnar et al., 2002; Hegji, 2003, etc).
In the second case, Mann (1986), among others, suggests that the increased usage of exchange rate
hedges may shield a firm from exchange rate shocks by allowing them to avoid passing such shocks to
consumers. She explains that hedging can allow firms to postpone passing through an exchange rate
shocks. However, in the long run a sufficiently large and permanent exchange rate shock will have to
be passed through to importers.
Finally, a common explanation for the declining and incomplete pass-through is that it is a by-
product of the low inflation environment of the 1990s. Indeed, Taylor (2000) argues that low inflation
environment, backed by a credible inflation-targeting monetary policy, allows firms to reduce the
extent to which they pass on exchange rate-related cost shocks.
A similar argument is developed in Devereux and Yetman (2010), where the degree of pass-
through is a function of the stance of monetary policy as it affects the degree of price stickiness. When
firms can adjust their frequency of price changes, loose monetary policy (high inflation) leads to
higher ERPT. Gagnon and Ihrig (2004), Campa and Goldberg (2005), Choudhri and Hakura (2006),
among others, have analyzed this relationship, finding a positive correlation between ERPT and
inflation indicators. More recently, based on state-space models, Nogueira and Leon-Ledesma (2010)
provide empirical evidence of a smooth decline in the impact of exchange rates on domestic inflation,
but do not support the hypothesis that a lower inflation environment precedes this declining ERPT.
Empirically, several studies report evidence of a declining exchange rate pass-through in industrial
countries. For instance, Campa and Goldberg (2002) argue that a shift in the composition of the
typical import basket from goods whose prices are less sensitive to exchange rate movements
explains the observed declines in the ERPT. Bailliu and Fujii (2004), using a panel of 11 industrial
countries, find a significant decline of pass-through since 1990. Olivei (2002) examines US import
prices for 34 product categories and explains that the larger presence of multilateral corporations
has led to a decline in exchange rate pass-through, owing to the prevalence of intra-company
transfer pricing, which is less responsive to exchange rate movements than prices based on arm’s
length trade.

3. The asymmetry of pass-through

Although many studies assume that the degree of pass-through is not really affected by the direc-
tion of exchange rates changes, there may be cases where the pass-through varies depending,
first, if the currency of the importer (exporter) is appreciating or depreciating (Delatte and Lopez-
Villavcencio (2012)) or, second, on the magnitude of changes in the exchange rate (Knetter, 1994;
Pollard and Coughlin, 2003; Wickremasinghe and Silvapulle, 2004).
For instance, by using the model of pricing to market, Marston (1990) tests for asymmetries in the
elasticity of Japanese transportation and electrical machinery exports. Using a sample of monthly data
between 1980 and 1987, he finds that appreciations have a larger effect for five sectors.
Goldberg (1995)4 and Kadiyali (1997)5 investigate the exchange rate pass-through in a single U.S.
automobile and photographic film industry respectively. They find significant asymmetry. In particular,
they provide evidence that the exchange rate pass-through is higher when the dollar depreciates.

(footnote continued)
movements, in the long run, and in the face of a protracted appreciation of the exporter’s currency, it will have to adjust its local
currency price to keep its margins from turning negative.
4
Using a discrete choice model.
5
Using a structural econometric model.
34 H.J. El bejaoui / International Economics 135-136 (2013) 29–46

Pollard and Coughlin (2004) used the profit maximization model to analyze the symmetry
response of import prices for 30 industries. They test whether the direction and the size of exchange
rate changes affect the pass-through. Their results indicate that more than half of the industries
respond asymmetrically to appreciations and depreciations. However, they do not find a clear
direction of the asymmetry across industries. They also conclude that the size effect is more important
than the direction effect.
Bussière (2007) analyzes if export and import prices of G7 countries respond symmetrically and
linearly to exchange rate changes. To this end, he used a standard linear model with polynomial
functions of the exchange rate. He finds that a non-linear effect cannot be neglected, although the
direction of the asymmetries and the magnitude of the non-linearity vary across countries.
Similarly, Yang (2007) had tested the asymmetry in pass-through to U.S. import prices at a
disaggregated level, through an adapted Dixit–Stiglitz model of product differentiation. He found that
for a few industries, the exchange rate pass-through increases when the dollar depreciates. Yet other
industries exhibit decreasing exchange rate pass-through when the dollar depreciated. This result
confirms that the direction of asymmetry cannot be predicted or assumed and it rather needs to be
formally tested.
Several theoretical arguments, such as capacity constraints, market share, the presence of menu
costs, quantity rigidities, export prices rigidities and even production switching, have been proposed
to explain asymmetric price adjustment, (see, for instance, Ware and Winter, 1988; Marston, 1990;
Knetter, 1994; Webber, 2000; Pollard and Coughlin, 2003). In this section, we briefly mention the
major explanations of a possible ERPT asymmetry.
Capacity constraints imply that, if exporters are subject to quantity constraints, exchange rate pass-
through will be higher when the exporting country’s currency is appreciating than when it is
depreciating. Indeed, when the exporter country’s currency depreciates, sales expressed in importer’s
currencies will decline. Then, in order to increase prices, exporters could increase their sales.
However, if firms have already reached full capacity, the capacity of increasing sales is limited. In this
case, they may be tempted to increase their mark-up instead of lowering prices in the importer’s
currency. Inversely, in the case of an appreciation the profits expressed in the importer’s currencies
will increase. Then, exporters can decide to keep their price level stable. Thus, the exchange rate pass-
through is higher in the case of appreciation than in the case of depreciation of the exchange rate
(Pollard and Coughlin, 2004; Knetter, 1994).
Similarly, if export quantities are rigid, for example because firms are already at full capacity, then
exporters may prefer to keep their price constant in the case of a depreciation of their currency
instead of deceasing it. In fact, the depreciation of the exporter's currency reducing the export prices
which may increase importer’s demand (Bussière, 2007; Knetter, 1993).
Another argument is the market share. According to Pollard and Coughlin (2004), if firms attempt
to maintain their market share, then when exporter’s currencies depreciates firms have the
opportunity to lower the import prices and thus to rise their market share, while keeping their mark-
ups constant. Inversely, during an appreciation, in order to maintain their market share, firms will
have to absorb a part of the inflationary impact that will determine a decline in their mark-ups.
Consequently, the exchange rate pass-through would be higher for depreciation than for appreciation.
The presence of menu costs can also explain the asymmetric pass-through. Indeed, exporters can
keep their price in importer’s currency unchanged if exchange rate changes are small, and change
their prices when exchange rate changes are above some threshold defined as large. In consequence,
Firms may respond asymmetrically with respect to the size of the exchange rate changes (Pollard and
Coughlin, 2004).
Several empirical studies argue that (export) prices are rigid in the short-run, particularly they are
downward rigid. According to Peltzman (2000) prices rise faster than they fall. This implies that when
the exchange rate depreciates, exporters increase their export prices by a larger extent than they
decrease them when the exchange rate appreciates. In addition, exporters are more likely to increase
their mark-up than to decrease it (Bussière, 2007).
Finally, production switching is also advanced as an argument. In this sense, a firm may be
exporting the final product but, at the same time, importing the corresponding inputs. Thus, when the
exporter country’s currency depreciates, firms will tend to switch towards inputs produced in their
 H.J. El bejaoui / International Economics 135-136 (2013) 29–46 35

own country. On the contrary, during an appreciation, firms will use imported inputs, implying no
pass-through (Pollard and Coughlin, 2004).

4. Methodology

In this paper, an asymmetric cointegrating autoregressive distributed lag (ARDL) model is imple-
mented to examine the responsiveness of export and import prices to exchange rate movements. This
methodology, developed by Pesaran et al. (2001) in its symmetric form and extended by Shin et al. (2009)
for the asymmetric case, allows us to test the existence of a short and a long-term relationship.
The ARDL model and the “bounds test” for long-run relationship have two major advantages over
the approach of Johansen and Juselius (1990). The first advantage is that this approach is applicable
even if the variables are stationary, integrated or mutually cointegrated. It does not require that the
series are integrated in the same order to find a possible cointegrating relationship between these
variables. The second advantage is that this methodology has better statistical properties in small
samples.6 Delatte and Lopez-Villavcencio (2012) used a similar methodology but, as previously
mentioned, they focused on inflation rather than export and import prices which is our case.
We denote pX and pM as the export and import prices denominated in the export's currency,
respectively, as the dependents variables. The explanatory variables are e, the nominal effective
exchange rate, ppi, the producer price index of the exporting country, which serves as a proxy for the
marginal costs borne by exporting firms, cpi, which is consumer price index of the importing country
and measures changes in the price level of consumer goods and services purchased by households.
The last explanatory variable, gdp, is the real gross domestic product. All variables are expressed in
logarithms.
The choice of these variables is explained by their relationship with the exports and imports prices.
In the literature, exchange rate pass-through is usually captured by the following symmetric
relationships:
For export price7
pXt ¼ β0 þ β1 et þβ2 ppit þ β3 gdpt þεt ð1Þ

where all the variables are in logarithms and εt is an i.i.d process. In (1), β1 represents the elasticity
of the exchange rate pass-through to export prices (i.e. the pass-through), β2 is the coefficient of
exporters' production costs and β3 refers to the direct bt effect of gross domestic product on the
export price.
For import price8
pMt ¼ δ0 þ δ1 et þ δ2 cpit þδ3 gdpt þΦt ð1′Þ

where Φt is an i.i.d process. In the previous equation δ1 refers to the direct effect of the exchange rate
on the import price, δ2 represents the elasticity of import prices to consumer price index and δ3 refers
to the direct effect of gross domestic product on the import prices.
As mentioned before, in order to test a linear long-run relationship, we use an ARDL model. Other
that the previously mentioned advantages, an interesting feature of the ARDL is that it takes into
account the error correction term. Hence, we can consider the following linear error correction
models:
For export prices:
ΔpXt ¼ β0 þ β1 pXt  1 þβ2 et  1 þ β3 ppit  1 þ β4 gdpt  1
4 4 4 4
þ ∑ αi ΔpXt  i þ ∑ Ωi Δet  i þ ∑ θi ppit  i þ ∑ Φi gdpt  i þ υt ð2Þ
t¼i t¼i t¼i t¼i

6
The cointegration test derived from the Johansen and Juselius approach are not robust to small samples.
7
A positive relationship between both the exchange rate and the producer price index with the export prices is expected.
8
We expect a negative relationship with exchange rate and a positive relationship with consumer price index.
36 H.J. El bejaoui / International Economics 135-136 (2013) 29–46

For import prices:

ΔpXt ¼ δ0 δ1 pMt  1 þ δ2 et  1 þ δ3 cpit  1 þδ4 gdpt  1
4 4 4 4
þ ∑ γ i ΔpMt  i þ ∑ ηi Δet  i þ ∑ ωi pit  i þ ∑ ρi Δdpt  i þ st ð2′Þ
t¼1 t¼1 t¼i t¼1

where Δ is a difference operator, αi, Ωi, θi,Φi in (2) and γi, ηi, ωi, ρi in (2′) are the short-run adjust-
ment terms.
The exchange rate pass-through represented in Eqs. (2) and (2′) correspond to the long run and
short run symmetric pass-through.
We can test for the null hypothesis of no symmetric long-run relationship. Two statistics are
proposed for testing the null hypothesis of no long-run relationship. The first one, named the tBDM,
test for the null of no significance of the error correction term. The second one, the F-test is
formulated as follows (for the case of the export prices):
H0 : β1 ¼ 0; H0 : β2 ¼ 0; H0 : β3 ¼ 0 and H0 : β4 ¼ 0

against
H1 : β1 a 0; H1 : β2 a 0; H1 : β3 a0 and H1 : β4 a 0

A similar procedure applies for import prices. Pesaran et al. (2001) have established two critical
thresholds for interpreting the test results. When the computed statistic is below its respective lower
critical values, then it is not possible to reject the null hypothesis of no long-run relationship. On the
contrary, if the computed statistic is higher than the upper critical value, there is evidence of a long-
run relationship. However, no clear conclusion can be drawn when the statistic is between the two
critical values.
Though interesting, the previous models do not take into account the direction of exchange rate
changes. In other words, the short or long-run pass-through is of the same magnitude (but with
different sign) independently if the exchange rate appreciates or if it depreciates. As we mentioned
before, there is no reason to believe that this is an accurate assumption.
In order to allow for asymmetric exchange rate pass-through, we follow the approach used in
Schorderet (2004) and Shin et al. (2009). This procedure requires constructing new variables that
capture episodes of appreciation and depreciation. The idea is to decompose a time series, St, into two
series (etþ ) and (et ) as follows:
t t t t
etþ ¼ ∑ Δetþ ¼ ∑ maxðΔet ; 0Þ; et ¼ ∑ Δet ¼ ∑ minðΔet ; 0Þ ð3Þ
j¼1 j¼1 j¼1 j¼1

where Δetþ and Δet are the partial sum processes of appreciations and depreciations, respectively.
Following Shin et al. (2009), Eqs. (2) and (2′) can be expressed to allow for asymmetric relationship. In
the case of export prices, we consider the following asymmetric ARDL model:

ΔpXt ¼ β0 þ β1 pXt  1 þβ2þ etþ 1 þ β3 et 1 þ β4 ppit  1 þβ5 gdpt  1

4 4 4 4 4
þ ∑ αi ΔpXt  i þ ∑ Ωiþ Δetþ i þ ∑ Ωi Δet i þ ∑ θi ppit  i þ ∑ Φi gdpt  i þυt ð4Þ
t¼1 t¼1 t¼1 t¼1 t¼1

and for import prices we estimate the following equation:

ΔpMt ¼ δ0 þ δ1 pMt  1 þδ2þ etþ 1 þδ3 et 1 þ δ4 cpit  1 δ5 gdpt  1

4 4 4 4 4
þ ∑ γ i ΔpMt  i þ ∑ ηiþ Δetþ i þ ∑ ηi Δet i þ ∑ ωi Δcpit  i þ ∑ ρi Δgdpt  1 st ð4′Þ
t¼1 t¼1 t¼i t¼1 t¼1

where  β2þ /β1,  β-3/β1,  β4/β1,  β5/β1 and δ2þ /δ1,  δ3 /δ1,  δ4/δ1, δ5/δ1 are the coefficients of long-
run relationship for export and import prices respectively.
Eqs. (4) and (4′) provide a relationship that may exhibit only short-run asymmetry, only long-run
asymmetry or combined long- and short-run asymmetries. As such, we are able to test whether
export and import prices react in the same way to an appreciation that a depreciation. In particular,
 H.J. El bejaoui / International Economics 135-136 (2013) 29–46 37

we test the following hypothesis (for export prices):

H0 : β2þ ¼ β3
against
H1 : β2þ aβ3
having estimated the model defined in (4) and (4′), and provided that the long-run relationship is
asymmetric (either in the short-run, in the long-run or in both), we can derive the asymmetric
dynamic multipliers of unit changes in etþ and et , respectively
h ∂pxt þ j h ∂pxt þ j
Mhþ ¼ ∑ þ ; Mh ¼ ∑  ; h ¼ 0; 1; 2…: ð5Þ
j ¼ 0 ∂et j ¼ 0 ∂et

Note that, by construction, as h-1, mhþ -θ þ and mh -θ  , where θ þ ¼  β2þ /β1 and θ  ¼  β3 /β1 for
(export price) and  δ2þ /δ1, δ3 /δ1 (for import price) are the asymmetric long-run coefficients, as
defined before. The multipliers, as defined by Shin et al. (2009), allow us to observe asymmetric
adjustment paths and/or duration of the disequilibrium, adding valuable information to the long- and
short-run forms of asymmetry (see Shin et al. (2009) for more details). As such, the multipliers
capture patterns of adjustment from the initial equilibrium to the new equilibrium following an
economic perturbation (i.e., a depreciation or appreciation).
To test the long-run symmetry, we use the Wald test, and if the symmetry is not rejected, then
Eqs. (4) and (4′) simplifies to:
ΔpXt ¼ β0 þ β1 pXt  1 þβ2 et  1 þ β3 ppit  1 þ β4 gdpt  1
4 4 4 4
þ ∑ αi ΔpXt  i þ ∑ Ωiþ Δetþ i þ ∑ θi ppit  i þ ∑ Φi gdpt  i þ υt ð6Þ
t¼i t¼i t¼i t¼i

ΔpMt ¼ δ0 þδ1 pMt  1 þ δ2 et  1 þ δ3 cpit  1 þ δ4 gdpt  1

4 4 4 4 4
þ ∑ γ i ΔpMt  i þ ∑ ηiþ Δetþ i þ ∑ ηiþ Δet i þ ∑ ωi Δcpit  i þ ∑ ρi Δgdpt  i þ st : ð6′Þ
t¼1 t¼1 t¼1 t¼1 t¼1

For the symmetry in the short-run, it can be tested by a two ways: (i) ΩIþ ¼Ωi for all i¼0,…, p or (ii)
∑qi ¼ 11 Ωti
þ
¼ ∑qi ¼ 11 Ωti

(for export price for example).
If short-run symmetry is not rejected, then Eq. (4) and (4′) simplifies to:
ΔpXt ¼ β0 þ β1 pXt  1 þβ2þ etþ 1 þ β3 et 1 þ β4 ppit  1 þβ5 gdpt  1
4 4 4 4
þ ∑ αi ΔpXt  i þ ∑ Ωi Δet  i þ ∑ θi ppit  i þ ∑ Φi gdpt  i þ υt ð7Þ
t¼1 t¼1 t¼1 t¼1

ΔpMt ¼ δ0 þ δ1 pMt  1 þδ2þ etþ 1 þδ3 et 1 þ δ4 cpit  1 þ δ5 gdpt  1

4 4 4 4
þ ∑ γ i ΔpMt  i þ ∑ ηi Δet  i þ ∑ ωi Δcpit  i þ ∑ ρi Δgdpt  i þ st ð7′Þ
t¼1 t¼1 t¼1 t¼1

5. Data and results

5.1. Data description

We use quarterly data ranging from 1980Q1 to 2011Q2 for Japan, France and the United States. For
Germany, since data are not available before, the estimation period starts in 1991.
Export and import prices, the dependent variables, are obtained from the OCDE. In particular, they
correspond to the price of non-commodity exports of goods and services and to the price of non-
commodity imports of goods and services respectively.
Nominal effective exchange rates are provided from the Bank of International Settlements (BIS)
and they are defined such that an increase (decrease) indicates an appreciation (depreciation). In the
38 H.J. El bejaoui / International Economics 135-136 (2013) 29–46

case of the partial sum processes, β2þ , δ2þ correspond then to an appreciation and β2 , δ2 to a
depreciation for export and import prices, respectively.
The rest of the variables (cpi, ppi and gdp) are obtained from the International Financial Statistics
(IFS). All the variables are seasonally adjusted and we work with its logarithms.

5.2. Results

In this section, we show the main results of the symmetric and asymmetric exchange rate pass-
through for export and import prices (Eqs. (2), (2′) and (4), (4′)). We first report the results for testing
the long -run relationship for both the symmetric and asymmetric models. The t and F tests results are
presented in Table 1.
According to the results in Table 1, there is a long-run relationship between export and import
prices and their explanatory variables except for Japan and France in the export price model. Indeed,
for Japan, the tBDM test statistic is below the lower critical values so we do not reject the null
hypothesis of no long-run relationship between export price and the explanatory variables. Regarding
the results for France, the Fpss test statistic is between the critical values. In this case, no conclusion
can be considered regarding the existence of a long-run relationship between the variables.
The estimated long-run coefficients of the symmetric and asymmetric exchange rate pass-through
are summarized in Table 2.
The results presented in Table 2 show that there is a negative relation between both export and
import prices and exchange rate changes. In other words, depreciation (appreciation) of exchange
rate increase (decrease) export and import prices. Striking though these results are for the case of
exports, they remain entirely consistent with some theoretical propositions. We will come back to this
point later.
As seen, the response of export prices to movements in the exchange rate is statistically significant,
but the degree of sensitivity varies across countries. In particular, the estimated coefficients for

Table1
Bounds cointegration test.

Export price Symmetric Asymmetric

β1 Fpss β1 Fpss

Coeff. tBDM Coeff. Prob Coeff. tBDM Coeff. Prob

n n n n
Germany  0.264  3.96 5.82 0.000  0.194  3.47 3.71 0.005
France  0.122  3.03 þ/  2.72þ/  0.034  0.121  3.017þ /  2.72 þ/  0.030
Japan No cointegration  0.328  3.71nn 5.81n 0.000
United-States  0.166  3.28nn 3.55n 0.0010  0.192  3.85n 4.51n 0.002

Import price Symmetric Asymmetric

δ1 Fpss δ1 Fpss

Coeff. tBDM Coeff. Prob Coeff. tBDM Coeff. Prob

Germany  0.359  6.04n 11.99 0.000  0.359  6.04n 11.99n 0.000

France  0.124  3.13 þ/  7.39 0.000  0.360  6.00n 9.12n 0.000
Japan  0.126  2.92 þ/  10.79 0.000  0.169  4.17n 11.49n 0.000
United-States  0.151  2.80 þ/  4.59 0.002  0.233  5.07n 8.50n 0.000

Notes: (1) β1 is the error correction parameter in Eqs. (2) and (4); (2) δ1 is the error correction parameter in Eqs. (2′) and (4′);
(3) Fpss denotes the PSS F-statistic testing the null hypothesis no cointegration; (4) tBDM is the BDM t-statistic testing the null
hypothesis β¼ 0 and δ¼ 0.
þ /  Indicate no conclusion.
n
Indicates statistical significance at the 5% level.
nn
Indicates statistical significance at the 10% level.
 H.J. El bejaoui / International Economics 135-136 (2013) 29–46 39

Table 2
Long-run estimates of the symmetric and asymmetric exchange rate pass-through.

Export price Import price

Symmetric Asymmetric Symmetric Asymmetric

Germany6 β2  0.139 β2 :  0.064 δ2  0.473  0.473

(  2.45) (  1.044) (  6.14) (  6.14)
β2þ :  0.147
(  2.76)
France6 β2  0.534  0.534 δ2 0.125 δ2 : 0.115
(  2.06) (  2.06) (0.43) (1.043)
δ2þ :  1.12
(  5.95)
Japan7 β2 β  2:  0.07 δ2  0.41  0.57
(  1.2) (  1.64) (  3.29)
β2þ : –0.36
(  7.36)
United-States7 β2  0.170  0.16 δ2  0.46  0.38
(  3.5) (  3.09) (  4.14) (  6.52)

Notes: (1) β2 is the pass-through to the export prices; (2) β2þ is the appreciation of exchange rate; (3) β2 is the depreciation of
exchange rate; (4) δ2 is the pass-through to the import prices; (5) δ2 is the depreciation of exchange rate; (6) δ2þ is the
appreciation of exchange rate; when the estimated coefficients are the same, it means that there are short and long run
symmetry. This is the case for Germany and France; (7) when there is only one coefficient in the asymmetric estimation
(different from the symmetric estimation’s coefficient); it means that there is long-run symmetry and a short-run asymmetry.
This is the case for the United-States and Japan.

Germany and the United States are both significant but under 0.2, while the coefficient for France
exceeds 0.5. These results suggest that a 1% nominal effective depreciation of German currency or the
US dollar would raise the price of their exports about 0.2% in terms of their own currencies. A similar
decline in the French exchange rate would increase their export prices more than 0.5%.
With respect to import prices, the results show that the long-run pass-through coefficient
is statistically significant only for Germany and United-states. These results indicate that a 1%
depreciation of the nominal exchange rate increases import prices by around 0.5% in both countries.
For France and Japan, the pass-through coefficient is not significantly different from zero, maybe
indicating that import prices are not sensitive to exchange rate or that the equation is wrongly
specified.
Note also that the average elasticity to exchange rate changes appears to be larger for import price
than for export prices, except in the case of France.
Let us now pay attention to the asymmetric pass-through, the primary objective of this study.
According to the results in Table 2, we note that the null hypothesis of symmetry in the response of
export and import prices due to the exchange rate changes can be rejected at the 5% critical level,
except in the case of France for the export prices and Germany for import prices. In these two
countries, the null hypothesis of symmetry is not rejected, implying that prices respond in the same
way to an appreciation that a depreciation of the exchange rate.
For the United States, note that symmetry is accepted only in the long-run. This means that prices
react symmetrically to an appreciation that depreciation for exports and imports prices in the long-
run, but a short-run asymmetry is allowed. Indeed, in the short-run it is admitted that the reaction of
export and import prices differs according to whether the exchange rate variation is an appreciation
or a depreciation.
Similarly, for Japan the symmetry is accepted only in the long-term. Thus, in the long-run, prices
respond symmetrically to exchange rates changes. In the short-run, however, the null hypothesis is
rejected. This result is valid only for the import price equation. In fact, for export prices, the symmetry
is rejected for both the short and the long-run.
One important finding in this study is that export prices increase due to depreciation (in the cases
of France and the United-States) and decline following an appreciation (in Germany and Japan).
40 H.J. El bejaoui / International Economics 135-136 (2013) 29–46

Indeed, as shown in Table 2, a 1% nominal effective appreciation of the German and the Japanese
currencies would produce a decline of export prices – in term of their own currencies – of about 0.1%
and 0.4% respectively. A similar depreciation would increase the export prices about 0.5% and 0.2% for
France and the United States, respectively.
The previous result can be explained by the fact that, following a depreciation, the exporters can
gain in price competitiveness if they maintain their prices in domestic currency unchanged. In this
case, they can increase the quantity of the exported goods. However, if they reach their maximum
capacity or if the adjustment costs are very high, it becomes difficult for them to adjust their
production upwards and in this case they are pushed to increase their prices (Bussière (2007)).9
Also, a country may be exporting the final good but, at the same time, importing the corresponding
inputs from another country. A depreciation of the exporting country’s currency makes the imported
inputs more expensive. As such, an exchange rate change affects the exporter’s costs, which leads the
exporting firm to raise its prices and subsequently, pass-through less of the exchange rate changes
(Gosh and Rajan, 2006).
Conversely, following an appreciation, exporters can lose competitiveness and market share if they
keep their prices unchanged in domestic currency. This explains why exporters generally use pricing
to market in order to partially reduce the loss caused by the exchange rate appreciation. Indeed,
according to Goldberg and Knetter (1997), the export firms try to reduce partially the impact of this
appreciation by accepting to reduce their margin, therefore by lowering their prices in order to keep
their market share.
For instance, Bussière, (2007) illustrated this result in the euro area. Indeed, between the end of
1998 to the last quarter of 2001 the euro depreciated by nearly 20% in nominal effective terms.
Afterwards, beginning in the second quarter of 2002, the euro started to appreciate again, and
regained about 20% of its value by the end of 2004. However, neither export nor import prices reacted
symmetrically to these two broadly similar exchange rate changes: during the initial depreciation,
export and import prices of goods increased by around 12% and 20%, respectively. On the contrary,
during the subsequent appreciation, they decreased by only 4% and 5%, respectively. This example
would suggest that appreciations and depreciations do not have symmetric effects on prices.
On the import’s price side, the null hypothesis of symmetry is accepted only for Germany. Indeed,
for France the result presented in Table 2 shows that import prices respond asymmetrically to
exchange rate variation. On the other hand, for Japan and United-states, the import price respond
asymmetrically only in the short-run.
Another important finding of our study is that appreciations have a larger effect than depreciations
on both export and import prices. Indeed, according to the results in Table 2, depreciations are not
significant for Germany and Japan (for export prices) and for France (for import prices). One potential
explanation for this is related to the strategies adopted by firms. Froot and Klemperer (1989) put
forward a strategic choice of firms between gaining market shares and increasing their profit margins
when an exchange rate variation occurs. In other words, if we accept this hypothesis, this means that
these countries react more to an appreciation than to depreciation by fear of losing market share.
Thus, when the exchange rate of the exporting country appreciates, exporters prefer to reduce their
margins and thus their prices to keep their market share.
To summarize, we can conclude that Germany (only for export prices), France (only for import
prices), Japan and the United states adopt an asymmetric strategy depending on the direction of
exchange rate change. We also document that export and import prices are more sensitive to an
appreciation than to depreciation. Comparing now the estimates from the four countries, we can note
some differences. For instance, the estimated long-run elasticity of export prices to exchange rate
changes appears to be rather low for Germany (13%) and the US (17%). For France, the elasticity of
export prices is found to be substantially higher (53%). This is an important result that brings to the
discussion, once more, the important asymmetries among countries belonging to the European
Monetary Union (EMU). This finding can be explained by differences in specialization of both

9
Even though is beyond the objective of this paper, capacity utilization was, in average, around 80–85% for the four
countries. This indicates that at least at the industry level, countries where not at full capacity utilization.
 H.J. El bejaoui / International Economics 135-136 (2013) 29–46 41

countries. Germany is specialized in exclusive and luxury product; where high know-how is required.
France instead is specialized mainly in food-processing industry. These different specializations
between these two countries make that German exports are less sensitive to an appreciation than
French exports.
Moreover, it has been suggested that French exporters have less market power than German
exporters and French exporters are ready to compress much more their mark-up than German to
preserve their market shares (Gaulier et al., 2006a, 2006b).

Et

Et

Et

Fig. 1. Short- and long-run multipliers.

42 H.J. El bejaoui / International Economics 135-136 (2013) 29–46

Et

Et

Fig. 1. (continued)

For Japan, the estimated long-run pass-through is around 36%. Note that it is also higher than the
corresponding coefficient for Germany and United-states. This can be explained by the fact that Japan
has an economy strongly dependent on the external sectors, which makes it more vulnerable during
an appreciation. Thereby, it might be the case that Japan tends to lower its export prices more than
Germany and the United-States in order not to lose its market share.
Regarding import prices, a 1% appreciation of the nominal exchange rate lowers French import
prices by about 1.1%. On the other hand, in the long-run, depreciations do not have effects on prices.
 H.J. El bejaoui / International Economics 135-136 (2013) 29–46 43

On the contrary, for Germany, Japan and the United States, a 1% appreciation lowers their import
prices between 0.4% and 0.5%.
Regarding short-run dynamics, a relationship between both export and import prices and exchange
rate changes varies across countries (Table 3 in Appendix A). Indeed, for Germany there is a positive
relation between export prices and the exchange rate changes. This implies that, a depreciation of the
exchange rate decrease export prices in the short-run, as expected by the theory.
Fig. 1 shows the short and long-run multipliers. These multipliers are very informative to analyze
the dynamics as they allow us to trace out the symmetric and asymmetric adjustment patterns
following positive and negative shocks to the exchange rate. As seen, after about ten periods (i.e. about
2 years and half), the initial positive effect in Germany turns to its long-run value. In the long run
depreciations are no longer significant.
For Japan, the United-States and France, according to the result in Table 3, there is evidence of a
negative relationship between export and import prices and exchange rate changes. These results are
consistent with our findings in the long-term analysis. The response of export prices to movements in
the exchange rate is statistically significant for all the countries, except for France. In this country this
result may indicate that export prices are not sensitive to exchange rate in the short-term.
As it is the case in the long-run, in the short-run the degree of sensitivity of exchange rate on
export prices varies across countries. For instance, the estimated coefficients for Germany and the
United States are both significant but relatively weak, indicating that a 1% nominal depreciation of the
German currency decreases exports prices by only about 0.1% in terms of its own currencies. For Japan,
on the contrary, the effect is considerably higher (around 0.4%).
Regarding import prices, the results in Table 3 show that there is pass-through in the short-run in all
the countries. For instance, a 1% depreciation of the nominal exchange rate increases import prices by
around 0.2% in France and Japan. For the United-States, exchange rate variations have less impact on import
prices. Indeed, a 1% depreciation of the nominal exchange rate increases import prices by only about 0.10%.
Turning now to the asymmetric pass-through, the results imply that the short-run pass-through
coefficient is statistically significant only for Japan and the United-States in the case of export
prices. Note that the null hypothesis of symmetry can be rejected at the 5% critical level only in the United-
States -for the export prices- and in the case of France, United-States and Japan -for import prices-. In
other words, prices respond differently to an appreciation than to a depreciation of the exchange rate. On
the contrary, in the case of Germany, the null hypothesis of symmetry is not rejected, implying that prices
respond in the same way to an appreciation than to a depreciation of the exchange rate.
In the case of France, the results indicate that a 1% nominal effective depreciation of French
currency would fall the import prices about 0.3%. With respect to the multipliers and the convergence

Table A1
The unit root test.

Variables Augmented Dickey Fuller test

France Germany Japan United-States

Import price  2.661629  2.872405  3.011578  2.746706

(  2.900137) (  2.900137) (  2.888932) (  2.889200)
Export price  1.073801  2.320088  2.018480 0.195932
(  2.889200) (  2.898145) (  2.888932) (  2.889474)
Neer  2.579929  2.391576  2.602069  3.173825
(  2.889474) (  2.898145) (  2.888932) (  2.888932)
ppi  0.356433  1.164969  2.588160 0.766531
(  2.889474) (  2.898623) (  2.889200) (  2.889200)
cpi  0.789288  4.134561  3.212051  2.505904
(  2.899619) (  2.899619) (  2.888932) (  2.888932)
gdp  1.699047  6.986633  3.968265  1.296449
(  2.889753) (  2.897678) (  2.581453) (  2.889474)

Note: The values in the bracket are the critical value at the 5% level.
44 H.J. El bejaoui / International Economics 135-136 (2013) 29–46

to the long-run equilibrium, Fig. 1 shows that this convergence is relatively quick (the correction
occurs with 5 periods). For the rest of the countries, the depreciation does not have any noticeable
effect on export and import prices. This implies that prices react only in the case of an appreciation of
the exchange rate. For example, a 1% nominal effective appreciation in Japan results in a fall of import
prices around 0.3%. For the United-States, an appreciation of the same magnitude decreases import
prices about 0.2%.

Table 3
Short-run estimates of the symmetric and asymmetric exchange rate pass-through.

Export price Import price

Symmetric Asymmetric Symmetric Asymmetric

Germany ΔSt  1 N.S ΔSt  1 N.S ΔSt  1 N.S ΔSt  1 N.S

ΔSt  2 0.08 ΔSt N.S ΔSt  2 0.26n ΔSt  2 0.26n
(1.91)nn (3.34) (3.34)
ΔSt  3 N.S ΔSt  3 N.S ΔSt  3 0.15nn ΔSt  3 0.15nn
(1.92) (1.92)
ΔSt  4 N.S ΔSt  4 N.S ΔSt  4 N.S ΔSt  4 N.S

France ΔSt  1 N.S ΔSt  1 N.S ΔSt  1  0.18n ΔSt 1 N.S

(  2.04)
ΔSt  2 N.S ΔSt N.S ΔSt  2 N.S ΔStþ 1 0.05n
(2.37)
ΔSt  3 N.S ΔSt  3 N.S ΔSt  3 N.S ΔSt 2 N.S
ΔSt  4 N.S ΔSt  4 N.S ΔSt  4 N.S ΔStþ 2 N.S
ΔSt 3 0.28n
(2.70)
ΔStþ 3 0.19n
(2.75)
ΔSt 4 N.S
ΔStþ 4 N.S

Japan ΔSt  1  0.42n ΔSt  1  0.31n ΔSt  1  0.17n ΔSt 1 N.S

(  7.03) (  5.51) (  2.24)
ΔSt  2 N.S ΔSt  2 N.S ΔSt  2  0.20n ΔStþ 1 N.S
(  2.84)
ΔSt  3 N.S ΔSt-3 N.S ΔSt  3 N.S ΔSt 2 N.S
ΔSt  4 N.S ΔSt  4 N.S ΔSt  4 N.S ΔStþ 2 N.S
ΔSt 3 N.S
ΔStþ 3  0.27n
(  2.64)
ΔSt 4 N.S
ΔStþ 4 N.S

UniteΔ  States ΔSt  1  0.10n ΔSt 1 ΔSt  1  0.10 ΔSt 1 N.S

(5.32) (  2.72)
ΔSt  2 N.S ΔStþ 1 N.S ΔSt  2 N.S ΔStþ 1  0.17n
(2.67)
ΔSt  3  0.03nn ΔSt 2  0.195n ΔSt  3  0.08n ΔSt 2 N.S
(  1.80) (  5.25) (  2.20)
ΔSt  4 N.S ΔStþ 2 N.S ΔSt  4 N.S ΔStþ 2 N.S
ΔSt 3 N.S ΔSt 3 N.S
ΔStþ 3 N.S ΔStþ 3 N.S
ΔSt 4 N.S ΔSt 4 N.S
ΔStþ 4 N.S ΔStþ 4 N.S

n
Indicates statistical significance at the 5% level.
nn
Indicates statistical significance at the 10% level.
 H.J. El bejaoui / International Economics 135-136 (2013) 29–46 45

6. Conclusions

Using quarterly data from 1985 to 2011, we investigate possible asymmetries in the reaction of
export and import prices to changes in the exchange rate for 4 major advanced countries. This exercise
is conducted using an asymmetric cointegrating autoregressive distributed lag (ARDL) model.
Our main results can be summarized as follow. First, we provide evidence of asymmetric ERPT
to appreciations and depreciations. This means that export and import prices respond differently
depending on the direction of the exchange rate variation.
In particular, the coefficient of the long-run pass-through is found significant only when the
nominal exchange rate appreciates. This implies that, in the long-run, an appreciation is clearly more
passed through to export prices than depreciations. This finding is consistent with the quantity
constraint theory.
However, we want to remark that this result cannot be generalized since the direction of the
asymmetry may vary by sectors or industrial activities. Indeed, the direction of the asymmetry in
these cases is not obvious ex ante and should be tested (Yang, 2007).
Second, we find that exporter’s currency appreciation would decrease export prices. This result
might be explained by the fact that firms are willing to lower their prices during an appreciation in
order not to risk losing market share, even by having lower profit margins.
On the import side, the results show that German import prices respond symmetrically to an
appreciation or depreciation. On the contrary the French, Japanese and American import prices react
asymmetrically depending on the direction of changes in exchange rates. Moreover, in the long-run,
appreciation is clearly more passed through to import prices than depreciations. This result is in line
with the market share explanation.
This mixed result was pointed out by a number of empirical studies (Pollard and Coughlin, 2004).

Appendix A

See Tables A1 and 3.

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