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"Natural hedging" of exchange rate risk: The role of imported input prices

Fauceglia, Dario and Shingal, Anirudh and Wermelinger, Martin (2012): "Natural hedging" of exchange rate risk: The role of imported input prices.

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Abstract

Using disaggregated quarterly trade data for Switzerland over 2004-2011, we study exchange rate pass through (ERPT) into imported intermediate input prices and its role in the price setting behaviour of exporters. We explicitly include disaggregated proxies for imported input prices in our analyses to investigate whether Swiss ex-porters may have “naturally hedged” exchange rate risks by sourcing inputs from abroad, especially during periods of strong CHF appreciation. Our results indicate high ERPT into imported input prices in all sectors and strong sectoral ERPT heterogeneity on the export side in both the short and long-run. They also suggest the use of “natural hedging” as an effective strategy to reduce exchange rate risks. Significantly however, Swiss exporters may not have adjusted export pricing practice in response to a strong CHF in the wake of the Euro crisis, which questions central bank intervention during that period.

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