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Mr. Matthieu Bellon
We examine the role of market characteristics and timing in explaining observed heterogeneity in VAT pass-through. We first extend existing theory to characterize the roles of imperfect competition and product differentiation, then investigate these relationships empirically using a panel of 14 Eurozone countries between 1999 and 2013. We find important roles for product market regulation and product quality, and little impact of advance announcement of reforms. Our findings have important implications for policy-makers considering VAT rate adjustments, by illuminating which of the consumers or the producers would experience the brunt of a reform across different settings.
Ms. Emine Boz, Ms. Gita Gopinath, and Mikkel Plagborg-Møller

Front Matter Page Research Department Contents 1 Introduction 2 Conceptual framework 3 Data 4 Bilateral pass-through, terms of trade, and the dollar 4.1 Exchange rate pass-through into prices 4.2 Terms of trade and exchange rates 4.3 Trade volume elasticity 4.4 Effects of U.S. monetary policy shocks 4.5 The dollar versus the euro 5 Determinants of pass-through heterogeneity 5.1 Bayesian model of pass-through heterogeneity 5.2 Results: price pass-through 5.3 Results: trade elasticity 6 Aggregate implications of

Mr. Matthieu Bellon

in Regimpact Indicator, and Categories Upon Which They are Scored 9. Cumulative Effect of Quality Scope on Pass-Through 10. Share of Intermediate Demand in Gross Output of Non-Manufacturing Sectors 11. Heterogeneity in Announcement Effects TABLES 1. Estimates of Pass-Through Heterogeneity 2. Estimates of Pass-Through Heterogeneity, Including Quality Range 3. Impact of Early Announcement on Pass-Through APPENDIX TABLES 1. Summary of VAT Reforms by Country 2. Summary of Observed VAT Rates and Prices 3. Pairwise Correlation Between

Ms. Emine Boz, Ms. Gita Gopinath, and Mikkel Plagborg-Møller
We document that the U.S. dollar exchange rate drives global trade prices and volumes. Using a newly constructed data set of bilateral price and volume indices for more than 2,500 country pairs, we establish the following facts: 1) The dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions. U.S. monetary policy induced dollar fluctuations have high pass-through into bilateral import prices. 2) Bilateral non-commodities terms of trade are essentially uncorrelated with bilateral exchange rates. 3) The strength of the U.S. dollar is a key predictor of rest-of-world aggregate trade volume and consumer/producer price inflation. A 1 percent U.S. dollar appreciation against all other currencies in the world predicts a 0.6–0.8 percent decline within a year in the volume of total trade between countries in the rest of the world, controlling for the global business cycle. 4) Using a novel Bayesian semiparametric hierarchical panel data model, we estimate that the importing country’s share of imports invoiced in dollars explains 15 percent of the variance of dollar pass-through/elasticity across country pairs. Our findings strongly support the dominant currency paradigm as opposed to the traditional Mundell-Fleming pricing paradigms.
Christian Saborowski and Mr. Sebastian Weber
We employ a structural panel VAR model with interaction terms to identify determinants of effective transmission from central bank policy rates to retail lending rates in a large country sample. The framework allows deriving country specific pass-through estimates broken down into the contributions of structural country characteristics and policies. The findings suggest that industrial economies tend to enjoy a higher pass-through largely on account of their more flexible exchange rate regimes and their more developed financial systems. The average pass-through in our sample increased from 30 to 60 percent between 2003 and 2008, mainly due to positive risk sentiment, rising inflation and increasingly diversified banking sectors. The crisis reversed this trend partly as banks increased precautionary liquidity holdings, non-performing loans proliferated and inflation moderated.
Mr. Matthieu Bellon

specification by interacting VAT reforms with measures of competition and scope for quality. We also examine the role of different varieties of VAT reform (e.g. reforms announced well in advance vs. surprise reforms, or tax hikes vs. tax cuts) in explaining some of the pass-through heterogeneity. Firstly, we find that changes in regulation in supplier markets play a substantial role, with a one standard deviation rise in the competition-friendliness of regulation (roughly equal to the difference between Austria and relatively uncompetitive Italy in 2013) increasing pass

Ms. Emine Boz, Ms. Gita Gopinath, and Mikkel Plagborg-Møller

the cross-dyad heterogeneity in pass-through coefficients is well explained by the propensity to invoice imports in dollars. We use the importer’s country-level dollar invoicing share from Gopinath (2015) as a proxy for the invoicing share of bilateral imports. 1 Standard panel regressions with interactions show that increasing the dollar invoicing share by 10 percentage points causes the contemporaneous dollar price pass-through to increase by 2.0−3.5 percentage points. Using a flexible hierarchical Bayesian framework to directly model pass-through heterogeneity

Christian Saborowski and Mr. Sebastian Weber

problematic to the extent that the characteristics we employ do not fully explain pass-through heterogeneity across countries. In addition to testing potential determinants of pass-through individually, we also include multiple characteristics in the model at the same time. This approach allows disentangling the correlations between the various potential determinants of transmission and identifying those that remain significant when included alongside others. Finally, we use panel VAR specifications with all relevant country characteristics to decompose pass