Banque de France Bulletin no. 242: Article 6 Exchange rate pass through to import prices in France: the role of invoicing currencies

Thematic: Economic research

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The US dollar is widely used in global trade to facilitate international transactions. In France, nearly 60% of France’s non EU imports are invoiced in US dollars every year. Thus, taking account of US dollar invoicing in international transactions can lead to a change in the estimation of exchange rate pass through to import prices. In particular, the depreciation of the nominal effective exchange rate (NEER) since January 2021 is greater when it is calculated using the weight of invoicing currencies rather than the weight of bilateral trade. In this episode in which the euro has depreciated more against the US dollar than against other currencies, conventional measures of the NEER based on weighting by bilateral
trade flows tend to underestimate the pass through of the exchange rate shock to import prices.

1 Exchange rate pass‑through to import prices

The magnitude of exchange rate pass‑through to the prices of goods exported and imported is highly relevant for the implementation of economic policy. In particular, it determines the adjustment of the trade balance and current account balance to external shocks. It also feeds through to inflation, given that consumer prices are in part influenced by the prices of imported goods, and the latter, in turn, are determined inter alia by fluctuations in the exchange rate.

Taking account of invoicing currencies is important in analysing this pass‑through. When imported goods are priced in the exporter’s currency, a depreciation of the importer’s exchange rate makes the goods imported more expensive in the local currency. By contrast, when prices are invoiced in the importer’s currency, they do not vary over the short term and are referred to as “rigid”. In other words, depreciation of the exchange rate does not have much impact on the price of imported goods. Invoicing international transactions in a “vehicle” currency, for example the US dollar – where neither the exporter nor the importer is located in the United States – also alters the pass‑through of exchange rate shocks to import prices (see Gopinath and Itskhoki, 2021).

Finally, the composition of invoicing currencies is also relevant if we wish to quantify the effects of exchange rate fluctuations on import prices from a macroeconomic point of view. The US dollar plays a dominant role in international transactions: in the case of France, nearly 60% of imports excluding the EU‑27 and the United Kingdom are invoiced in US dollars, whereas on the same basis, the United States accounted for 15.6% of our imports in 2019. Accordingly, movements in the euro exchange rate against the dollar can lead to fluctuations in the price of imported goods, including when they do not come from the United States.

In this article, we look at the period which, since January 2021, has seen a sharp depreciation of the euro against the US dollar (a depreciation of 21.6% at 27 September 2022). Our analysis focuses on the role of invoicing currencies in exchange rate pass‑through to France’s import prices (excluding the EU). It emerges that taking account of invoicing currencies helps us to better understand this pass‑through mechanism, as well as its effects from the point of view of imported inflation. …