Exchange Rate Pass-Through in ASEAN Countries: An Application of the SVAR Model

Abstract

Central banks in emerging countries generally question the effect of exchange rate passthrough into price levels in the national economy in order to implement monetary policy effectively. This paper is conducted in response to these macroeconomic concerns. Five founding members of the Association of Southeast Asian Nations (ASEAN), for which all the required data are available, are included in our sample with up-to-date time-series data until 2016. We use a structural vector autoregressive model in this study. Several interesting findings emerged from our study. First, we find incomplete exchange rate pass-through to domestic prices, and the producer price index is found to be affected more than the consumer price index. Second, the exchange rate shocks are found to have an immediate effect within one quarter on producer prices in all the countries. Third, variance in domestic prices is found to be caused mainly by shocks from oil prices, output gaps, and exchange rates, with some differences in the extent of effects across countries. Fourth, in these five countries, interest rates appear to play a minor role in explaining the inflation rate. We recommend that policy makers pursuing price stability in the economy focus on exchange rates and interest rate policy with great caution.

A Simultaneous-Equation Model of Estimating the Response of the Consumer Price to Exchange Rate Movements in Thailand

“…In comparison, the estimated ERPT to the consumer price in this paper is greater than the estimates found by Ito and Sato (2007) and Anh, Quan, Phuc, Chi and Duc (2018) and less than the estimates reported by Ito and Sato (2008), Prasertnukul, Kim and Kakinaka (2010) and Kohlscheen (2010). The finding that ERPT to the consumer price declines after the adoption of inflation targeting is consistent with the results reported by Aleem and Lahiani (2014) and Dilla, Achsani and Anggraeni (2017) but in contrast with the finding presented by Prasertnukul, Kim and Kakinaka (2010).…”

A Simultaneous-Equation Model of Estimating Exchange Rate Pass-Through in Malaysia

“…Based on the mean values, the elasticity is estimated to be 0.1194, suggesting that a 1% depreciation in the Malaysian ringgit would lead to 0.1194% increase in the consumer price index. In comparison, the estimated ERPT to the consumer price in this paper is greater than the estimates found by Sato (2007, 2008) and Anh, Quan, Phuc, Chi and Duc (2018) but less than the estimates made by Ahmad (2009) and Kassi, Sun, Ding, Rathnayake and Assamoi 2019A 1 percentage point increase in the government borrowing-to-GDP ratio will cause the CPI to decline by 0.3409. The negative coefficient may suggest a relatively strong crowding-out effect, causing consumption and investment spending to decline more than deficit-financed spending.…”

Modeling the Impact of Agricultural Shocks on Oil Price in the US: A New Approach

“…Wang et al (2014 used the SVAR approach to analyze the impact of different oil-related shocks on various agricultural commodity prices. SVAR approach has been widely used as well (Vo et al 2018;Nguyen and Vo 2019). The study found that the impact of oil-specific demand shocks on the many agricultural commodity prices was only significant after the food price crisis.…”