With the rise of the global value chain, numerous researchers have used global input-output tables (WIOTs) to shed light on the problems of the international economy. These tables are useful for measuring exposure to international risks (Borin et al. 2022), allocating carbon emissions across the country (Airebule et al. 2022), or looking for trade-generated income beneficiaries (Bohn et al. 2021).
In a recent study with Hadrien Camatte, Antoine Lalliard, and Christine Rifflart (Camtte et al. 2021), we use different WIOTs to analyze cost-push inflation. Results from various WIOTs are combined and can be extrapolated in recent years. We see that countries in the eurozone have very different vulnerabilities to external shocks, which makes it difficult to determine the response of general monetary policy to them. Here, we analyze both the resilience of consumer prices in the Western economy and the rise in energy prices (with a focus on the growth of Russian hydrocarbons) and the resilience of consumer prices to exchange rate variations.
The elasticity of the consumer price in the price of hydrocarbons
The rise in commodity prices in the wake of Russia’s aggression in Ukraine has highlighted the weakness of the cost-push inflation in the Western economy. Russia is Europe’s largest natural gas supplier, meeting 34% of the region’s demand by 2021, according to the International Energy Agency. Germany is particularly vulnerable to rising Russian natural gas prices (Afunts et al. 2022). Using the World Input-Output Database (WIOD), we explain which countries have suffered the most from rising energy prices. The goal of our accounting approach is to illustrate the interdependence and weaknesses of price-pushing inflation. We do not wish to assess the economic impact of the war in Ukraine, as such an assessment would require in-depth study with more sophisticated behavioral estimates for product replacement and price adjustment.
Figure 1 represents the elasticity of consumer prices for pushing fuel prices with a focus on the impact of a push on the price of Russian hydrocarbons. The impact of the impact on Russian hydrocarbons is negligible for the United States, which is largely self-sufficient in energy and imports only 7% of its oil from Russia. The price effect is also limited to the United Kingdom, which imports less than 10% of its oil and gas from Russia. In contrast, the Netherlands and Germany, which import about one-third of their oil and gas from Russia, accounted for about 20% of the total impact of energy price shocks for Russia. The effects of rising Russian hydrocarbon prices are even greater for Eastern European countries such as Finland, Lithuania and the Slovak Republic, which import more than 80% of their oil and gas from Russia.
Figure 1 Consumer price weakness due to rising hydrocarbon prices and rising Russian hydrocarbon prices, WIOD
Source: Trade in Value Added (TiVA), Revision 4 (OECD 2018) and Author Count.
One caveat is that our calculations rely on the Fourth Amendment to the Trade in Value Added (TiVA) data, which was published in 2018 and does not represent recent changes in world trade. In the next section below, we will explain how we have been able to fill the data gaps in recent years.
The elasticity of consumer prices for two decades of exchange rate variability
Using WIOTs to explain how exchange rate movements affect inflation over the two decades from 1995 to 2019, we move on to more basic practice. Exchange rate movements vary from country to country. It depends, among other things, on the openness of their respective trades, the relative integration of sectors and firms in the international production chain, and the currency of shipments for trade. The uniqueness of this analysis compared to other WIOT-based practices is that differences in exchange rates have different effects for domestic and foreign prices.
Consistent with the existing literature, we see that in response to the 1% appreciation of the domestic currency, the prices of domestic consumers have declined by about 0.10% on an average worldwide. The impact of exchange rate fluctuations on consumer prices has been largely stable over the last two decades. Our results are probably a high limit. In fact, the simplification of our accounting method depends on the assumption that the fluctuations in the exchange rate completely pass over the import price. However, a large portion of the literature suggests that pass-through is incomplete, even in the long run, as a result of nominal price adjustments or pricing-to-market behavior of firms. This way the lower estimate will be made using alternative estimates.
Figure 2 shows that our results are stronger for using two different datasets: TiVA from OECD and WIOD (Timmer et al. 2015, 2016). We further show that a precise assessment of the effect of exchange rate variability on consumer prices can be made without resorting to up-to-date WIOTs. WIOT builds data-demands and they are usually published every few years. As a result, most WIOTs have not been available in recent years. To fill in the data gap, we use up-to-date GDP and extrapolate the effect of exchange rate variability on consumer prices using imported costs and trade statistics of intermediary products. The dotted line in Figure 2 shows that we have got a reliable estimate.
Figure 2 The elasticity of the consumer price shocks the exchange rate
FormulaIn: WIOD, TIVA, World Bank, BACI, and Camatte et al. (2021)
Variations and channels of effect of exchange rate variations on consumer prices
Depending on the country, the effect of 1% exchange rate fluctuations on domestic prices ranges from 0.05% to 0.22%, reflecting the different degrees of openness of trade and the difference of foreign goods content in domestic use. Figure 3 shows that resilience is lower for large developed and developing countries. For example, we find an elasticity of 0.06 for the United States. Within the euro zone, the elasticity of domestic consumer prices differs significantly with fluctuations in the exchange rate of the euro. It ranges from 0.07 in Italy to 0.18 in Ireland, a large business sector and a small open economy with a large share of trade outside the euro area. Larger countries (France, Germany, Italy and Spain) and countries whose trade is concentrated with eurozone partners (such as Portugal and Greece) have a resilience close to 0.10, which reflects a low openness for trade. For small open economies such as Luxembourg, Malta, Slovakia and Ireland, resilience is twice as high. The value of resilience is closely, but not entirely, related to the portion of imported goods and services for household use. Overall, the higher the share of a country’s imports in consumption, the greater the elasticity of the domestic consumer price at the exchange rate.
Figure 3 Consumer price resilience in domestic currency for 2019 is a push, extrapolated from 2014 WIOD data
To analyze the role of the global value chain in the transmission of exchange rate valuation, we identify four channels through which exchange rate valuation affects consumer prices:
- The price of imported final goods sold directly to domestic customers;
- The value of imported inputs entering domestic production;
- Value of input exported through imported foreign production; And
- Changes in domestic and foreign production costs pass through the pricing of inputs for domestic and foreign products, resulting in further variation in production costs through input-output connections.
Figure 4 shows that the first two channels explain three-quarters of the transition of the exchange rate variation in the internal price. The last two channels, which reflect the impact of participation in the global value chain, play a limited role, where there is marked diversity in different countries.
Figure 4 Channels of shock rate of exchange rate on consumer price (WIOD 2014)
Using different WIOTs and extrapolations, we have shown the difference between the prices of strong products, especially the weakness of countries in terms of pushing Russian goods and exchange rates. This is a problem for the euro area, as it makes it difficult to calibrate any general policy response. Our accounting exercise is mainly by way of large matrix inversion. Although many of our accounting methods rely on simplification assumptions, studying cross-country variations arising from different input-output structures is an important starting point for a more complete study of cost-push inflation.
Author’s note: The opinions expressed do not necessarily reflect the views of the authors and not necessarily those of Bank de France.
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