Eects of a Mandatory Local Currency Pricing Law On the Exchange Rate Pass-Through 1

Transcription

1 Eects of a Mandatory Local Currency Prcng Law On the Exchange Rate Pass-Through 1 Renzo Castellares 2 Hrosh Toma 3 Central Reserve Bank of Peru 1 Document wrtten for the 4th BIS-CCA Research Network. The vews expressed are those of the authors and do not necessarly reect those of the Central Reserve Bank of Peru. 2 renzo.castellares@bcrp.gob.pe 3 hrosh.toma@bcrp.gob.pe 1 / 28

2 Introducton Followng a hypernatonary process n the late 80s and the early 90s, the Peruvan economy progressvely dollarzed as the value of the Peruvan sol fell. Many rms chose foregn currency prcng to cover themselves aganst the exchange rate deprecaton rsk and aganst the loss of the real value of ther goods or servces sold. Ths prce dollarzaton had an mpact over the exchange rate pass-through (ERPT). 2 / 28

3 Introducton What would happen f rms suddenly were forced to follow local currency prcng? Ths s what happened n Peru wth Law Usng the enactment of a mandatory law to follow local currency prcng n Peru n 2004 as an experment, we analyze whether ths polcy had an mpact over the (short-run) ERPT. We propose a smple model and reduced form estmatons for our analyss. We nd that the ntroducton of ths polcy revealed the heterogenety among goods and servces: the ERPT falls for some and stays the same for others. 3 / 28

4 Prce Dollarzaton Fgure: Prce Dollarzaton n Advertsements Source: El Comerco. 4 / 28

5 Prce Dollarzaton Fgure: Prce Dollarzaton n Advertsements Source: El Comerco. 5 / 28

6 Prce Dollarzaton We classfy the goods and servces by separatng between those prced n soles and those prced n dollars before We use ndvdual prce ndces at the 4-dgt CPI classcaton (55 goods and servces). We consder a prce category to be dollarzed f 15% or more of the goods and servces n that category are prced n dollars. We do ths based on the advertsements that were publshed between 1995 and 2004 n El Comerco, the man newspaper n Peru. 6 / 28

7 Prce Dollarzaton Table: Goods and Servces wth Dollarzed Prces ( ) Non-Durables Durables Servces Alcoholc Beverages, Clothng and Textles, Personal Care Items, Shoes Electrc Applances, Electronc Equpment, Furnture, Jewelry, Tableware, Therapeutc Equpment, Vehcles Ar Transportaton, Entertanment, Ground Transportaton, Hotels, Housng Rental and Home Improvement, Insurance, Personal Care Servces, Postal and Telephone Servces, Tourst Servces Source: El Comerco. 7 / 28

8 Prce Dollarzaton Fgure: Prce Dollarzaton by Category ( ) Others 86.4 Clothng 66.7 Transport and Communcatons 37.3 Housng and Utltes 34.6 Houseware 22.7 Educaton and Lesure 18.6 Health Expenses 12.1 Food and Beverages Prce Dollarzaton Percentage Source: El Comerco. 8 / 28

9 Prce Dollarzaton Fgure: Prce Dollarzaton and Imported Content Prce Dollarzaton Imported Content Servces Non Durables Durables Source: El Comerco. 9 / 28

10 Mandatory Law on Local Currency Prcng In September 2004, upon a proposal from the CRBP, the Peruvan congress enacted Law It was a modcaton to the Consumer Protecton Law whch mpled that all prces had to be dsplayed n soles (and optonally n any other currency), as a measure to curb prce dollarzaton. We use ths fact as a break n the prcng behavor. The perod between the Law's proposal and approval was barely a month, so rms could not antcpate the eects of ths Law. In addton, ths Law seemed of mnor nterest snce there was no news or dscusson about t on the meda. 10 / 28

11 Evdence on the Eects of the Polcy Fgure: Correlaton Between Prces and Exchange Rate Correlaton Corr:t,t 60 Corr:t,t Corr( P USD, ner) Corr( P PEN, ner) Source: CRBP, Natonal Statstcs Insttute. 11 / 28

12 Evdence on the Eects of the Polcy Fgure: Correlaton Between Prces and Exchange Rate Correlaton Corr:t,t 60 Corr:t,t Corr( P USD,nodur, ner) Corr( P USD,serv, ner) Corr( P USD,dur, ner) Source: CRBP, Natonal Statstcs Insttute. 12 / 28

13 A Theoretcal Model On Derent Pass-Throughs Why do the correlatons fall after the ntroducton of the Law? Why are there derentated eects? In general, the economc lterature proposes three derent sources for derent short-run ERPTs among goods and servces. Dollarzed costs Market power Menu costs We propose a smple model of rm prcng behavor under monopolstc competton wth the rst two characterstcs. 13 / 28

14 A Theoretcal Model On Derent Pass-Throughs We follow a standard partal equlbrum statc ERPT model (see Bursten & Gopnath 2014). We assume an economy nhabted by an nnte number of rms and consumers. Each rm produces a derentated good or servce: a unque varety ndexed by z [0, 1]. Frms compete under a monopolstc competton structure, so each rm has enough market power n order to decde over ther prces. We focus on an specc rm that before the Law follows foregn currency prcng and after the Law swtches to local currency prcng. Customers have ther ncome n soles. So, f they buy a good or servce n dollars, they must convert the currency beforehand. 14 / 28

15 A Theoretcal Model On Derent Pass-Throughs Before the Law, the prce was expressed n dollars. p t = e t + p t = e t + µ t (p t p t ) + c t (q t, e t ) p t s the log-prce n soles, p t s the log-prce n dollars, p t s the log-aggregate prce level, q t s the log-demand, e t s the log-exchange rate, µ t s the log-mark-up and c t are the log-costs. The ERPT would be: p t e t = 1 + α t 1 + Γ t α t = c t / e t s the exchange rate elastcty of the costs (the dollarzed costs of ) and Γ t = µ t / (p t p t ) s the prce elastcty of the mark-up. Derent values for the ERPT can be acheved through derent values of α t and Γ t. 15 / 28

16 A Theoretcal Model On Derent Pass-Throughs After the law, customers only pay n soles. The ERPT now becomes p t = µ t (p t p t ) + c t (q t, e t ) p t e t = α t 1 + Γ t Leavng everythng else constant, for a specc rm that before the Law follows foregn currency prcng and after the Law follows local currency prcng, the ERPT falls as 1+α t 1+Γ t > α t 1+Γ. t 16 / 28

17 Estmaton To nd the eects of the Law on the ERPT we estmate the followng reduced form panel data estmaton: p t = J β j=0 j ner t j + J γ j=0 jx t j + N δ =1 Z + N J ζ n=1 j=0 jz ner t j + J j=0 η jd law t j ner t j + N =1 J j=0 θ jd law t j Z ner t j + ε t Dependent varable, p t, s the percentage change of the prce ndex between perods t and t 1. Man ndependent varable, ner t, s the percentage change of the nomnal exchange rate between perods t and t 1. We dene the ERPT as the sum of the β j coecents assocated to ner t. X t represents tme-varyng control varables common for all the prce ndces, whle Z represents prce ndex-specc control varables. Second row controls for the heterogeneous prce ndex-specc eects on the ERPT through the nteracton term Z ner t. Thrd row ncludes nteracton terms that consder the ndcator varable Dt law, whch equals 1 for the perod n whch the Law has been actve (September 2004 and onwards). Coecent related to Dt law ner t s nterpreted as the derental of the overall ERPT before and after the Law, whle coecent assocated to Dt law Z ner t captures the heterogenous eects of the Law on the ERPT for derent groups of goods and servces. 17 / 28

18 Estmaton To nd the eects of the Law on the ERPT we estmate the followng reduced form panel data estmaton: p t = J β j=0 j ner t j + J γ j=0 jx t j + N δ =1 Z + N J ζ n=1 j=0 jz ner t j + J j=0 η jd law t j ner t j + N =1 J j=0 θ jd law t j Z ner t j + ε t Dependent varable, p t, s the percentage change of the prce ndex between perods t and t 1. Man ndependent varable, ner t, s the percentage change of the nomnal exchange rate between perods t and t 1. We dene the ERPT as the sum of the β j coecents assocated to ner t. X t represents tme-varyng control varables common for all the prce ndces, whle Z represents prce ndex-specc control varables. Second row controls for the heterogeneous prce ndex-specc eects on the ERPT through the nteracton term Z ner t. Thrd row ncludes nteracton terms that consder the ndcator varable Dt law, whch equals 1 for the perod n whch the Law has been actve (September 2004 and onwards). Coecent related to Dt law ner t s nterpreted as the derental of the overall ERPT before and after the Law, whle coecent assocated to Dt law Z ner t captures the heterogenous eects of the Law on the ERPT for derent groups of goods and servces. 18 / 28

19 Estmaton To nd the eects of the Law on the ERPT we estmate the followng reduced form panel data estmaton: p t = J β j=0 j ner t j + J γ j=0 jx t j + N δ =1 Z + N J ζ n=1 j=0 jz ner t j + J j=0 η jd law t j ner t j + N =1 J j=0 θ jd law t j Z ner t j + ε t Dependent varable, p t, s the percentage change of the prce ndex between perods t and t 1. Man ndependent varable, ner t, s the percentage change of the nomnal exchange rate between perods t and t 1. We dene the ERPT as the sum of the β j coecents assocated to ner t. X t represents tme-varyng control varables common for all the prce ndces, whle Z represents prce ndex-specc control varables. Second row controls for the heterogeneous prce ndex-specc eects on the ERPT through the nteracton term Z ner t. Thrd row ncludes nteracton terms that consder the ndcator varable Dt law, whch equals 1 for the perod n whch the Law has been actve (September 2004 and onwards). Coecent related to Dt law ner t s nterpreted as the derental of the overall ERPT before and after the Law, whle coecent assocated to Dt law Z ner t captures the heterogenous eects of the Law on the ERPT for derent groups of goods and servces. 19 / 28

20 Estmaton To nd the eects of the Law on the ERPT we estmate the followng reduced form panel data estmaton: p t = J β j=0 j ner t j + J γ j=0 jx t j + N δ =1 Z + N J ζ n=1 j=0 jz ner t j + J j=0 η jd law t j ner t j + N =1 J j=0 θ jd law t j Z ner t j + ε t Dependent varable, p t, s the percentage change of the prce ndex between perods t and t 1. Man ndependent varable, ner t, s the percentage change of the nomnal exchange rate between perods t and t 1. We dene the ERPT as the sum of the β j coecents assocated to ner t. X t represents tme-varyng control varables common for all the prce ndces, whle Z represents prce ndex-specc control varables. Second row controls for the heterogeneous prce ndex-specc eects on the ERPT through the nteracton term Z ner t. Thrd row ncludes nteracton terms that consder the ndcator varable Dt law, whch equals 1 for the perod n whch the Law has been actve (September 2004 and onwards). Coecent related to Dt law ner t s nterpreted as the derental of the overall ERPT before and after the Law, whle coecent assocated to Dt law Z ner t captures the heterogenous eects of the Law on the ERPT for derent groups of goods and servces. 20 / 28

21 Data For the calculus of the exchange rate we only take nto account the blateral soles / US dollars nomnal exchange rate, as the use of foregn currences other than the US dollar s very lmted n the Peruvan economy. We use ndvdual prce ndces at the 4-dgt CPI classcaton from January 1995 to March There are 55 prce ndces, whch are aggregatons of lower level prce sub-ndces and are expressed n soles. We use the mported content from the 2007 nput-output table as a proxy for dollarzed costs. The mported content s dened as the share of mported consumpton (ncludng ntermedate and nal goods) correspondng to each prce ndex. 21 / 28

22 Law Eects Table: Law Eects (1) (1) (2) ner t 0.110*** 0.060* ner t *** Dt law ner t ** D law t 1 t ** D USD ner t 0.139*** D USD ner t ** Dt law D USD ner t D law t 1 DUSD 1 t * N 14,876 14,876 R *** p<0.01, ** p<0.05, * p<0.1 Note: Omtted coecents for control varables. Robust standard errors clustered by month. 22 / 28

23 Law Eects Table: Law Eects (2) k = dur k = nodur k = serv D USD,k ner t 0.207*** ** D USD,k Dt law ner t *** 0.131*** D USD,k ner t ** D law t 1 DUSD,k ner t ** *** N 14,876 R *** p<0.01, ** p<0.05, * p<0.1 Note: All columns belong to the same regresson. Omtted coecents for control varables, ner t, ner t 1, Dt law ner t and Dt 1 ner law t 1. k = [dur, nodur, serv] denotes the type of good or servce. Robust standard errors clustered by month. 23 / 28

24 Imported Content Table: Imported Content h = 5 h = 7 ner t ner t share m,h ner t 0.002*** 0.002*** share m,h ner t N 7,074 9,643 R *** p<0.01, ** p<0.05, * p<0.1 Note: Omtted coecents for control varables. h = [5, 7] denotes the sze of the tme wndows. Robust standard errors clustered by month. 24 / 28

25 Imported Content Table: Imported Content and Law Eects (1) h = 5 h = 7 ner t ner t * share m,h ner t 0.005*** 0.003* share m,h ner t Dt law ner t D law Dt law ner t 1 t share m,h ner t * D law t 1 sharem,h ner t N 7,074 9,643 R *** p<0.01, ** p<0.05, * p<0.1 Note: Omtted coecents for control varables, Dt law share m,h and Dt 1 law share m,h. h = [5, 7] denotes the sze of the tme wndows. Robust standard errors clustered by month. 25 / 28

26 Imported Content Table: Imported Content and Law Eects (2) h = 5 h = 7 share m,h ner t share m,h ner t D law t share m,h ner t D law t 1 sharem,h share m,h D USD t D USD t D law t D law t 1 DUSD t ner t ner t 0.009*** 0.008*** share m,h ner t Dt USD share m,h ner t * * share m,h ner t N 7,074 9,643 R *** p<0.01, ** p<0.05, * p<0.1 Note: Omtted coecents for control varables, ner t, ner t 1, Dt law share m,h, Dt 1 law share m,h, Dt law ner t and Dt 1 ner law t 1. h = [5, 7] denotes the sze of the tme wndows. Robust standard errors clustered by month. 26 / 28

27 Results Wth the enactment of Law 28300: ERPT, n general, falls because of the swtch from foregn currency prcng to local currency prcng. ERPT for dollarzed non-durable goods s completely oset, whle ERPT for dollarzed durable goods s partally oset. Ths derence could be related to the hgher mported content of the dollarzed durables. ERPT for dollarzed servces does not change after the enactment of the Law. A rst explanaton could be that rms provdng dollarzed servces adjusted ther mark-ups to leave ther ERPT almost unchanged. A second explanaton could be that the mported content for the servces ncreased after the enactment of the Law. Unfortunately, there s no data avalable to test these hypotheses. Addtonal exercses: Indvdual estmatons Dynamc estmatons Results are robust to: Inaton targetng (IT) regme adopton Credt de-dollarzaton process 27 / 28

28 Conclusons Usng dsaggregated CPI data we nd that Law reduced the overall ERPT n Peru. We nd a complete oset for dollarzed non-durable goods and a partal oset for dollarzed durable goods. We nd no sgncant eects of the Law on the ERPT for dollarzed servces. We nd a larger mported content mples a larger ERPT. However, ths eect falls after the enactment of the Law. 28 / 28