Non-Linear Adjustment of Import Prices in the European Union

43 Pages Posted: 16 Apr 2008

See all articles by José Manuel Campa

José Manuel Campa

University of Navarra - Madrid Campus - IESE Business School; National Bureau of Economic Research (NBER)

José Manuel Gonzalez Minguez

Banco de España

Maria Sebastia-Barriel

Bank of England - Structural Economic Analysis Division

Date Written: April 14, 2008

Abstract

This paper focuses on the non linear adjustment of import prices in national currency to shocks in exchange rates and foreign prices measured in the exporters' currency of products originating outside the euro area and imported into European Union countries (EU 15). The paper looks at three different types of non linearities: (a) non proportional adjustment (the size of the adjustment grows more than proportionally with the size of the misalignments), (b) asymmetric adjustment to cost increasing and cost decreasing shocks, and (c) the existence of thresholds in the size of misalignments below which no adjustment takes place. There is evidence of more than proportional adjustment towards long run equilibrium in manufacturing industries. In these industries, the adjustment is faster the further away current import prices are from their implied long run equilibrium. In contrast, a proportional linear adjustment cannot be rejected for some other imports (especially within agricultural and commodity imports). There is also strong evidence of asymmetry in the adjustment to long run equilibrium. Deviations from long run equilibrium due to exchange rate appreciations of the home currency result in a faster adjustment than those caused by a home currency depreciation. Finally, we also find that adjustment takes place in the industries in our sample only when deviations are above certain thresholds, and that these thresholds tend to be somewhat smaller for manufacturing industries than for commodities.

Keywords: exchange rate adjustment, European Union, monetary union

JEL Classification: F31, F36, F42

Suggested Citation

Campa, José Manuel and Gonzalez Minguez, José Manuel and Sebastia-Barriel, Maria, Non-Linear Adjustment of Import Prices in the European Union (April 14, 2008). Banco de España Working Paper No. 0635, Bank of England Working Paper No. 347, Available at SSRN: https://ssrn.com/abstract=1120228 or http://dx.doi.org/10.2139/ssrn.1120228

José Manuel Campa (Contact Author)

University of Navarra - Madrid Campus - IESE Business School ( email )

Camino del Cerro del Aguila 3
Madrid, 28023
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

José Manuel Gonzalez Minguez

Banco de España ( email )

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28014 Madrid
Spain
+34 91 338 5518 (Phone)
+34 91 338 6190 (Fax)

Maria Sebastia-Barriel

Bank of England - Structural Economic Analysis Division

Threadneedle Street
London, EC2R 8AH
United Kingdom

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