Exchange Rate Pass-Through to Domestic Prices: Does the Inflationary Environment Matter?

Threshold effects of openness on real and nominal effective exchange rates in emerging and developing economies

“…Similarly, Taylor (2000) links the degree of passthrough to the inflation environment, specifically with the adoption of inflation targeting (IT), finding that after the adoption of an IT framework, the exchange rate pass-through effect is lowered through the expectation to persistently low (target) inflation. Others have supported these findings linking IT adoption with lower pass-through effects, such as Choudhri and Hakura (2006), Gagnon and Ihrig (2004), Edwards (2006) and Mishkin and Schmidt-Hebbel (2007). On the other hand, Choudhri and Hakura (2012) demonstrate that the mix of producer and local currency pricing used by local firms explains the degree of pass-through, using a dynamic stochastic general equilibrium model.…”

“…The relationship between the exchange rate and inflation rate is well-documented through the exploration of the exchange rate pass-through effect, which is known to be stronger and more pervasive in emerging and developing economies, although declining in recent years and weaker in countries with lower inflation rates (Ca'Zorzi et al, 2007;Choudhri & Hakura, 2006). However, there is some evidence of an effect of high inflation episodes on exchange rates, although as noted by Braumann (2000), this occurs primarily as an outlying condition of crises and other macro-fundamental turmoil, spilling over into exchange rates.…”

Nonlinearities in the Exchange Rate Pass-Through: The Role of Inflation Expectations

“…For instance, it appears that the ERPT to consumer prices declined in the 1990s as a result of the price stabilisation policies adopted by many developed countries (Taylor, 2000;Bailliu and Fujii, 2004;Takhtamanova, 2010). The hypothesis that a weaker ERPT reflects a low inflationary environment was confirmed empirically by Choudhri and Hakura (2006) using data for 71 countries with different inflation targeting regimes. Supportive evidence was also found for the case of emerging markets, which experience a similar decline in the ERPT for lower levels and greater stabilisation of the inflation rate (Mihaljek and Klau, 2008;Winkelried, 2014).…”

International Policy Coordination and Simple Monetary Policy Rules

“…The share of fixed price agents is assumed to be v = 0.75 so that a certain degree of price flexibility is retained. For the parameter measuring the degree of pass-through in the home and foreign country we assume η = η * = 0.46, which corresponds to empirical evidence for the short run average pass-through elasticities across OECD countries (see, e.g., Choudhri andHakura, 2001). We examine three different cases.…”