Exchange rate movements and foreign consumption

Abstract

We investigate how exchange rate movements affect inbound consumption (consumption in the domestic market by non-residents) and outbound consumption (consumption abroad by domestic residents). We find evidence of almost complete exchange rate pass-through into the price of outbound consumption while no pass-through into the price of inbound consumption. However, the exchange rate is an important determinant of both real inbound and real outbound consumption and a rise in exchange rate improves the balance of foreign consumption. We also find that there are strong substitution effects 1) between domestic consumption and outbound consumption and 2) inbound consumptions between Korea and Japan with respect to the changes in exchange rate.