Academic journal article Journal of Agricultural and Resource Economics

Quality, Sourcing, and Asymmetric Exchange-Rate Pass-Through into U.S. Coffee Imports

Academic journal article Journal of Agricultural and Resource Economics

Quality, Sourcing, and Asymmetric Exchange-Rate Pass-Through into U.S. Coffee Imports

Article excerpt

(ProQuest: ... denotes formulae omitted.)


Since the collapse of the fixed exchange-rate regime, the uncertainties of volatile exchange rates and the resulting risks to international trade have attracted the attention of both theoretical and empirical trade economists. While the theoretical literature disagrees about the direction of the effect of exchange-rate volatility on trade flows, a rapidly growing empirical literature has benefited from progressive time-series econometric techniques and more available macro- and micro-level data in the quest for answers (Bahmani-Oskooee and Hegerty, 2007).

Past empirical studies largely neglected the possibility of a nonlinear and/or asymmetric reaction of prices or trade to external shocks (McKenzie, 1999). More recent literature, however, has shown that asymmetries in trade are often structural in nature and thus should be modeled in terms of short- and long-run responses in order to overcome assumptions about the uniform pass-through of macroeconomic shocks. Understanding the dynamics in which currency fluctuations are passed through major commodity supply chains has become of paramount importance to policy-making, trade-risk management, and the welfare of economic agents at large. A case in point is the increasing evidence of asymmetric and nonlinear pass-through of exchange rates and crude oil prices to the price of gasoline (e.g., Kilian, 2008; Atil, Lahiani, and Nguyen, 2014; Bagnai and Mongeau Ospina, 2015). Delatte and López-Villavicencio (2012) and Fedoseeva and Werner (2016) investigate exchange-rate pass-through in the context of exporter pricing-to-market behavior, while Verheyen (2013) studies European-U.S. export trade at large. Fedoseeva and Zeidan (2016) analyze European industry-level exports to the BRIC countries and Fedoseeva (2014, 2016) conducts the only published studies to test for long-run asymmetries and nonlinearities in agricultural commodity trade. Independent of their specific focuses, these studies conclude that the assumptions of symmetry and linearity in trade elasticities are likely to lead to biased coefficient estimates and misleading policy implications unable to represent the true underlying trade behaviors.

Yet in spite of its strong relevance for trade in non-oil commodities, research on patterns of passthrough or its determinants has received little attention so far (Verheyen, 2013). In particular, few studies have addressed issues of exchange rate and price pass-through in export or import demand equations for agricultural commoditiesâĂŢwhere the price volatility of recent years (Ganneval, 2016) and exchange-rate interdependence (Hatzenbuehler, Abbott, and Foster, 2016) challenge the standard assumption of linear and symmetric market reactions.

We focus on the international trade in a high-value commodity, raw coffee, a market that features many of the current trade economics topics discussed above. With the liberalization of the international coffee market in 1989 (Lindsey, 2003; Russell, Mohan, and Banerjee, 2012), strategic sourcing behavior on the part of U.S. roasters (International Trade Centre, 2011; Karp and Perloff, 1993) and shifts in consumer preferences and demand across Asia following the "latte revolution" (Chu, 2013; Ponte, 2002) have added to the complexity of trade elasticities in commodity supply (Soderbery, 2015). Yet despite the strong relevance of coffee trade to many export-oriented developing and emerging economies, little empirical research is available.

This paper generates estimates of trade elasticities for the U.S. raw coffee import trade to detect trade developments and their implications for policy. Ăs a classic "dollar commodity," the vast bulk of coffee trade exposes exporters to U.S. dollar (USD) exchange-rate risks, adversely affecting export revenues. Major movements in local currency unit (LCU)-USD exchange rates directly affect the relative pricing of different coffee qualities, which are often linked to specific origins (e. …

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