A Pass-Through Revival

Abstract

It has been found that the pass-through of the exchange rate and import prices to domestic prices has weakened over time. The most recent research, however, shows that this trend may have been reversed. Recent studies have applied various time series methods to the Japanese data, and estimated responses of domestic prices to the exchange rate and import prices in different time periods. Those studies have found signs that pass-through has made an impressive comeback since the early 2000s. This paper reviews the most recent evidence and discusses its policy implications. I argue that the exchange rate has likely regained its status as an important transmission mechanism of monetary policy to domestic prices.

Exchange Rate Pass-Through in an Emerging Market: The Case of the Czech Republic

“…This result is due to the substantial presence of foreign components in the consumption basket. and Shioji (2014), this paper partially contradicts the common perception that pass-through is of a fading nature. To a certain extent, Beirne and Bijsterbosch (2011) fall into this category of papers because they also find a somewhat higher degree of pass-through.…”

Comment on “A Pass-Through Revival”

“…Taylor () pointed out a decline of the exchange rate pass‐through starting from the early 1990s, which has been supported by the subsequent empirical studies. However, Shioji () attempts to demonstrate empirically that the exchange rate pass‐through in Japanese imports has revived in recent years. Such a resurgence may be particularly important for central banks that have to tackle a deflationary economy at the zero lower bound of the nominal interest rate, because an exchange rate depreciation can raise domestic price inflation as long as the transmission mechanism along the pricing chain works well.…”

Japan's Persistent Deflation and Monetary Policy: Editors' Overview

“…Esturo Shioji () analyzes recent developments on “pass‐through,” which he defines as the effects of the changes in exchange rate and import input prices on domestic prices, in Japan. There is a broad agreement in the literature that this pass‐through declined over the past decades.…”

“…Yushi Yoshida () concisely explains the previous literature on exchange rate pass‐through and notes that a large number of studies have examined exchange rate pass‐through on the export side but not on the import side. Yoshida also thinks that Shioji () is an important contribution to the current policy discussions of inflation in Japan. While Yoshida agrees with Shioji that the “pass‐through revival” is normatively important in Japan's current economic situation, Yoshida does not agree with Shioji when Shioji argues that “this apparent revival of pass‐through likely means that the central bank has regained an important transmission mechanism of its policy to the private sector.” Yoshida's disagreement stems from his observation that the BoJ cannot maneuver a depreciation of the Japanese yen.…”

“…Abe and Shiotani () investigate the implications of deflation/inflation for income redistribution across heterogeneous households. Finally, Shioji () discusses policy options to stop deflation, with a particular focus on the exchange rate channel, which is considered to be effective even when the policy rate is already at the ZLB.…”