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Year 2021, , 47 - 57, 30.06.2021

Onur Seker

https://doi.org/10.17261/Pressacademia.2021.1404

Abstract

References

  • Baharumshah, A., Sirag, A., & Soon, S.-V. (2017). Asymmetric exchange rate pass-through in an emerging market economy: The case of Mexico. Research in International Business and Finance, 247-259.
  • Baqueiro, A., Diaz de Leon, A., & Torres, A. (2003). Fear of floating or fear of inflation? The role of the exchange rate pass-through. BIS Papers No:19, 338-354.
  • Belke, A., Dubova, I., and Osowoski, T. (2016). Policy uncertainty and international financial markets:the case of Brexit. Applied Economics 50 (34-35): 3752-3770. doi:10.1080/00036846.2018.1436152.
  • Bouakez, H., & Rebei, N. (2005). Has exchange rate pass-through really declined in Canada? Bank of Canada Working Paper, 2005-29.
  • Breinlich, H., Leromain, E., Novy, D., and Sampson, T. (2019). Exchange rates and consumer prices: evidence from Brexit. CEPR Discussion Paper 8001 (8): 1-50.
  • Brooks, C. (2008). Introductory Econometrics for Finance. Cambridge University Press.
  • Ca' Zorzi, M., Hahn, E., and Sanchez, M. (2007). Exchange rate pass-through in emerging markets. ECB Working Paper 739: 1-31.
  • Campa, J., and Goldberg, L. S. (2002). Exchange rate pass-through into import prices: a macro or micro phenomenon? NBER Working Paper 8934: 1-33.
  • Choudhri, E. U., and Hakura, D. S. (2006). Exchange rate pass-through to domestic prices: does the inflationary environment matter? Journal of International Money and Finance 25 (4): 614-639. doi:10.1016/j.jimonfin.2005.11.009.
  • Cil, N. (2018). Finansal Ekonometri. İstanbul: Der Yayınları.
  • Dhingra, S., Machin, S., and Overman, H. (2017). Local economic effects of Brexit. National Institute Economic Review 242 (1): 1-42. doi:10.1177/002795011724200112.
  • Dhingra, S., Ottaviano, G., Sampson, T., and Van Reenen, J. (2016b). The consequences of Brexit for UK trade and living standards. Centre for Economic Performance 2: 1-12.
  • Dhingra, S., Ottaviano, G., Sampson, T., and Van Reenen, J. (2016a). The impact of Brexit on foreign investment in the UK. Centre for Economic Performance 3: 1-10.
  • Enders, W. (2014). Applied Econometric Time Series. Wiley.
  • Goldberg, P. K., and Knetter, M. M. (1997). Goods prices and exchange rates: what have we learned. Journal of Economic Literature 5862: 1243-1272. doi:10.3386/w5862.
  • Gueorguiev, N. (2003). Exchange rate pass-through in Romania. IMF Working Paper 3 (130): 1-29.
  • Gujarati, D. (2011). Econometrics by Example. Palgrave Macmillan.
  • Hohlmeier, M., and Fahrholz, C. (2018). The impact of Brexit on financial markets—Taking stock. İnternational Journal of Financial Studies 6 (3): 1-9. doi:10.3390/ijfs6030065.
  • Hooper, P., and Mann, C. L. (1989). Exchange rate pass-through in the 1980s: the case of US imports of manufactures. Brookings Papers on Economic Activity 1: 297-337. doi:10.2307/2534500.
  • Jiménez-Rodríguez, R., and Morales-Zumaquero, A. (2016). A new look at exchange rate pass-through in the G-7 countries. Journal of Policy Modeling 38(5): 985-1000. doi:10.1016/j.jpolmod.2016.06.007
  • Ito, T., and Sato, K. (2006). Exchange rate changes and inflation in post-crisis Asian economies: VAR analysis of the exchange rate pass-through. Journal of Money, Credit and Banking 52 (6): 1407-1438. doi:10.1111/j.1538-4616.2008.00165.x.
  • Kirchgässner, G., and Wolters, J. (2007). Introduction to Modern Time Series Analysis. Springer.
  • Leigh, D., and Rossi, M. (2002). Exchange rate pass-through in Turkey. IMF Working Paper 2 (204): 1-18.
  • Loloh, F. (2014). Exchange rate pass-through in Ghana. Bank of Ghana Staff Working Paper.
  • McCarthy, J. (1999). Pass-through of exchange rates and import prices to domestic inflation in some industrialized economies. BIS Working Papers 79: 1-37.
  • Menon, J. (1996). The degree and determinants of exchange rate pass-through: market structure, non-tariff barriers and multinational corporations. The Economic Journal 106 (435): 434-444. doi:10.2307/2235258.
  • Mishkin, F. (2002). Structural issues for successful inflation targeting in transition countries. Conference on Monetary Policy in the Environment of Structural Changes. National Bank of Poland, Falenty, Poland.
  • Ocran, M. K. (2010). Exchange rate pass-through to domestic prices: the case of South Africa. Prague Economic Papers 4: 291-306. doi:10.18267/j.pep.378.
  • Otani, A., Shiratsuka, S., & Shirota, T. (2003). The decline in the exchange rate pass-through: evidence from Japanese import prices. Monetary and Economic Studies, 53-82.
  • Parsons, C. R., and Kiyotaka, S. (2008). New estimates of exchange rate pass-through in Japanese exports. International Journal of Finance and Economics 13 (2): 174-183. doi:10.1002/ijfe.337.
  • Schiereck, D., Kiesel, F., and Kolaric, S. (2016). Brexit: (Not) another Lehman moment for banks? Finance Research Letters 19: 291-297. doi:10.1016/j.frl.2016.09.003.
  • Schwert, G. (1989). Tests for unit roots: A Monte Carlo investigation. Journal of Business and Economic Statistics 7 (2): 147-159.
  • Sims, C. A. (1980). Macroeconomics and reality. Econometrica 48 (1): 1-48. doi:10.2307/1912017.
  • Stulz, J. (2007). Exchange rate pass-through in Switzerland: Evidence from vector autoregressions. Swiss National Bank Economic Studies 4, 1-32.
  • Taguchi, H., & Bolortuya, J. (2019). Inflation targeting and the pass-through effect in Mongolia. Business and Economic Research, 9 (2), 57-71.
  • Taylor, J. B. (2000). Low inflation, pass-through, and the pricing power of firms. European Economic Review, 44 (7): 1389-1408. doi:10.1016/S0014-2921(00)00037-4.
  • Watson, P., and Teelucksingh, S. (2002). A Practical Introduction to Econometric Methods: Classical and Modern. University of the West İndies Press.
  • Welfens, P. J. (2018). BREXIT aus Versehen: Europaische Union zwischen Desintegration und neuer EU. Wuppertal: Springer.
  • Welfens, P. J., and Baier, F. J. (2018). Brexit and foreign direct investment: key issues and new empirical findings. International Journal of Financial Studies 6 (2): 1-21. doi:10.3390/ijfs6020046.
  • Winters, L., and Fernandes, A. (2018). The effect of exchange rate shocks on firm-level exports: evidence from the Brexit vote. Centre for Economic Policy Research DP13253: 1-30

EXCHANGE RATE PASS-THROUGH UNDER THE EFFECT OF BREXIT: AN EMPIRICAL ANALYSIS ON THE UNITED KINGDOM

Year 2021, , 47 - 57, 30.06.2021

Onur Seker

https://doi.org/10.17261/Pressacademia.2021.1404

Abstract

Purpose - This study aimed to examine the effects of the environment of uncertainty caused by the United Kingdom (UK) people's decision to leave the European Union (EU) as a result of the referendum held on June 23, 2016, on the UK's economy. In this context, the effects of fluctuations in exchange rates on prices (consumer and producers) and profitability rates were analyzed.
Methodology - The data set was divided into the Brexit period (2016:06 - 2020:02) and the pre-Brexit period (2010:01 - 2016:05) for a comparative analysis of the effect of Brexit on ERPT. Structural Vector Autoregressions (SVAR) models were used to get rid of the non-theoretical structure of standard VAR models, and the McCarthy (1999) model was taken as the reference for the theoretical framework of the model. The analysis of variance decomposition was performed to examine the relationship between the variables using the dynamic structure of VAR models.
Findings- The unexpected result of the referendum and the environment of uncertainty caused by this result in the UK's economy had negative effects, especially on producer prices. It was observed that the increase in costs, which was due to fluctuations in the exchange rate caused by the environment of uncertainty after the referendum, could not be fully reflected on consumer prices by firms. According to the results of the analysis of variance decomposition, while 5.55 percent of changes in producer prices and 4.44 percent of changes in consumer prices in the Pre-Brexit period were explained by changes in the exchange rate, these rates were found to be 16.45 percent and 6.41 percent, respectively, during the Brexit period.
Conclusion- During the Brexit period, it was observed that firms could not reflect the increases in costs to prices and this situation caused a decrease in the profitability rates of the firms. Some of these decreases in the profitability ratios of firms are expected to be permanent. However, it will be possible to make a distinction between structural effects and periodic effects after the terms of the agreement are determined. Considering the overlap of two important global events, such as the COVID-19 pandemic and the Brexit process, it is observed that the UK's economy is going through an extremely sensitive period. Accordingly, the monetary authorities in the UK should take into account many more variables while taking decisions during this period, unlike previous periods.

Keywords

Exchange rate pass-through inflation Brexit variance decomposition SVAR analysis

References

  • Baharumshah, A., Sirag, A., & Soon, S.-V. (2017). Asymmetric exchange rate pass-through in an emerging market economy: The case of Mexico. Research in International Business and Finance, 247-259.
  • Baqueiro, A., Diaz de Leon, A., & Torres, A. (2003). Fear of floating or fear of inflation? The role of the exchange rate pass-through. BIS Papers No:19, 338-354.
  • Belke, A., Dubova, I., and Osowoski, T. (2016). Policy uncertainty and international financial markets:the case of Brexit. Applied Economics 50 (34-35): 3752-3770. doi:10.1080/00036846.2018.1436152.
  • Bouakez, H., & Rebei, N. (2005). Has exchange rate pass-through really declined in Canada? Bank of Canada Working Paper, 2005-29.
  • Breinlich, H., Leromain, E., Novy, D., and Sampson, T. (2019). Exchange rates and consumer prices: evidence from Brexit. CEPR Discussion Paper 8001 (8): 1-50.
  • Brooks, C. (2008). Introductory Econometrics for Finance. Cambridge University Press.
  • Ca' Zorzi, M., Hahn, E., and Sanchez, M. (2007). Exchange rate pass-through in emerging markets. ECB Working Paper 739: 1-31.
  • Campa, J., and Goldberg, L. S. (2002). Exchange rate pass-through into import prices: a macro or micro phenomenon? NBER Working Paper 8934: 1-33.
  • Choudhri, E. U., and Hakura, D. S. (2006). Exchange rate pass-through to domestic prices: does the inflationary environment matter? Journal of International Money and Finance 25 (4): 614-639. doi:10.1016/j.jimonfin.2005.11.009.
  • Cil, N. (2018). Finansal Ekonometri. İstanbul: Der Yayınları.
  • Dhingra, S., Machin, S., and Overman, H. (2017). Local economic effects of Brexit. National Institute Economic Review 242 (1): 1-42. doi:10.1177/002795011724200112.
  • Dhingra, S., Ottaviano, G., Sampson, T., and Van Reenen, J. (2016b). The consequences of Brexit for UK trade and living standards. Centre for Economic Performance 2: 1-12.
  • Dhingra, S., Ottaviano, G., Sampson, T., and Van Reenen, J. (2016a). The impact of Brexit on foreign investment in the UK. Centre for Economic Performance 3: 1-10.
  • Enders, W. (2014). Applied Econometric Time Series. Wiley.
  • Goldberg, P. K., and Knetter, M. M. (1997). Goods prices and exchange rates: what have we learned. Journal of Economic Literature 5862: 1243-1272. doi:10.3386/w5862.
  • Gueorguiev, N. (2003). Exchange rate pass-through in Romania. IMF Working Paper 3 (130): 1-29.
  • Gujarati, D. (2011). Econometrics by Example. Palgrave Macmillan.
  • Hohlmeier, M., and Fahrholz, C. (2018). The impact of Brexit on financial markets—Taking stock. İnternational Journal of Financial Studies 6 (3): 1-9. doi:10.3390/ijfs6030065.
  • Hooper, P., and Mann, C. L. (1989). Exchange rate pass-through in the 1980s: the case of US imports of manufactures. Brookings Papers on Economic Activity 1: 297-337. doi:10.2307/2534500.
  • Jiménez-Rodríguez, R., and Morales-Zumaquero, A. (2016). A new look at exchange rate pass-through in the G-7 countries. Journal of Policy Modeling 38(5): 985-1000. doi:10.1016/j.jpolmod.2016.06.007
  • Ito, T., and Sato, K. (2006). Exchange rate changes and inflation in post-crisis Asian economies: VAR analysis of the exchange rate pass-through. Journal of Money, Credit and Banking 52 (6): 1407-1438. doi:10.1111/j.1538-4616.2008.00165.x.
  • Kirchgässner, G., and Wolters, J. (2007). Introduction to Modern Time Series Analysis. Springer.
  • Leigh, D., and Rossi, M. (2002). Exchange rate pass-through in Turkey. IMF Working Paper 2 (204): 1-18.
  • Loloh, F. (2014). Exchange rate pass-through in Ghana. Bank of Ghana Staff Working Paper.
  • McCarthy, J. (1999). Pass-through of exchange rates and import prices to domestic inflation in some industrialized economies. BIS Working Papers 79: 1-37.
  • Menon, J. (1996). The degree and determinants of exchange rate pass-through: market structure, non-tariff barriers and multinational corporations. The Economic Journal 106 (435): 434-444. doi:10.2307/2235258.
  • Mishkin, F. (2002). Structural issues for successful inflation targeting in transition countries. Conference on Monetary Policy in the Environment of Structural Changes. National Bank of Poland, Falenty, Poland.
  • Ocran, M. K. (2010). Exchange rate pass-through to domestic prices: the case of South Africa. Prague Economic Papers 4: 291-306. doi:10.18267/j.pep.378.
  • Otani, A., Shiratsuka, S., & Shirota, T. (2003). The decline in the exchange rate pass-through: evidence from Japanese import prices. Monetary and Economic Studies, 53-82.
  • Parsons, C. R., and Kiyotaka, S. (2008). New estimates of exchange rate pass-through in Japanese exports. International Journal of Finance and Economics 13 (2): 174-183. doi:10.1002/ijfe.337.
  • Schiereck, D., Kiesel, F., and Kolaric, S. (2016). Brexit: (Not) another Lehman moment for banks? Finance Research Letters 19: 291-297. doi:10.1016/j.frl.2016.09.003.
  • Schwert, G. (1989). Tests for unit roots: A Monte Carlo investigation. Journal of Business and Economic Statistics 7 (2): 147-159.
  • Sims, C. A. (1980). Macroeconomics and reality. Econometrica 48 (1): 1-48. doi:10.2307/1912017.
  • Stulz, J. (2007). Exchange rate pass-through in Switzerland: Evidence from vector autoregressions. Swiss National Bank Economic Studies 4, 1-32.
  • Taguchi, H., & Bolortuya, J. (2019). Inflation targeting and the pass-through effect in Mongolia. Business and Economic Research, 9 (2), 57-71.
  • Taylor, J. B. (2000). Low inflation, pass-through, and the pricing power of firms. European Economic Review, 44 (7): 1389-1408. doi:10.1016/S0014-2921(00)00037-4.
  • Watson, P., and Teelucksingh, S. (2002). A Practical Introduction to Econometric Methods: Classical and Modern. University of the West İndies Press.
  • Welfens, P. J. (2018). BREXIT aus Versehen: Europaische Union zwischen Desintegration und neuer EU. Wuppertal: Springer.
  • Welfens, P. J., and Baier, F. J. (2018). Brexit and foreign direct investment: key issues and new empirical findings. International Journal of Financial Studies 6 (2): 1-21. doi:10.3390/ijfs6020046.
  • Winters, L., and Fernandes, A. (2018). The effect of exchange rate shocks on firm-level exports: evidence from the Brexit vote. Centre for Economic Policy Research DP13253: 1-30
There are 40 citations in total.

Details

Primary Language English
Subjects Finance, Business Administration
Journal Section Articles
Authors

Onur Seker 0000-0003-1940-7452

Publication Date June 30, 2021
Published in Issue Year 2021

Cite

APA Seker, O. (2021). EXCHANGE RATE PASS-THROUGH UNDER THE EFFECT OF BREXIT: AN EMPIRICAL ANALYSIS ON THE UNITED KINGDOM. Journal of Business Economics and Finance, 10(2), 47-57. https://doi.org/10.17261/Pressacademia.2021.1404

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