Bai et al Policy brief March 2021
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- In this project, we explore how exchange rate fluctuations affect firms' import and domestic activities.
- Our analysis takes advantage of the transaction-level Customs data and the newly available Electronic Billing Machines (EBM) data, which covers the universe of the firm-to-firm and firm-to-consumer transactions by VAT registered firms in Rwanda.
- Using the Customs data, we find that exchange rate fluctuations significantly affect import prices. Currency depreciation also reduces the quantity of imports.
- Using the EBM data, we find evidence of import substitution, i.e., importers increase domestic purchases in response to an increase in exchange rate. Furthermore, we find limited pass-through of exchange rate fluctuation to domestic prices.
- Our analysis suggests that a weaker Rwandan Franc is not necessarily leading to higher domestic prices that Rwandan consumers face.