Exchange rate pass-through and monetary policy in emerging markets: Mexico and South Korea as case study

Abstract

<p>In the nineties, emerging markets like Mexico and South Korea experienced external shocks that depreciated their domestic currencies that eventually led to an overall inflation. The goal in this paper is to estimate long-run and short-run exchange rate pass-through (ERPT) elasticities to consumer and import prices and determine whether monetary policies have reduced the ERPT. Two Vector Error Correction Models were estimated using monthly data from 1995 to 2018. The results show that monetary policies did reduce the ERPT on consumer and import prices in Mexico. In South Korea, the ERPT to import prices was stronger, only when we account for the 1997 financial crisis, the results show that monetary policies contributed to reduce the ERPT to both consumer and import prices.</p><p> </p>