Inflation and Exchange Rate Pass-Through

Abstract

This paper investigates exchange rate pass-through into consumer prices by considering the nature of the shock triggering currency movements. By individually estimating structural factor-augmented vector autoregression models for 55 countries, monetary policy shocks are shown to be associated with higher exchange rate passthrough measures compared to other domestic shocks, while global shocks have widely di¤erent e¤ects across countries. Pass-through measures tend to be lower in countries that combine ‡exible exchange rate regimes and credible in ‡ation targets, where central bank independence can greatly facilitate the task of stabilizing in ‡ation by using the exchange rate as a bu¤er against external shocks. It is implied that exchange rate pass-through should be investigated by considering the nature of the shock that triggers currency movements and country characteristics that a¤ect the response of prices.

Inflation in Low-Income Countries

“…The estimated pass-through is more pronounced in LICs than in advanced economies or other EMDEs (Figure 4). This finding is overall consistent with the findings in Ha, Stocker, and Yilmazkuday (2019) where the estimates of the pass-through ratio are on average greater in EMDEs than in advanced economies, although the country group in that paper includes few LICs. This may again reflect a weaker anchoring of inflation expectations in LICs than in the other country groups, due to weaker commitment to medium-term inflation objectives on the part of LIC central banks and greater challenges to that commitment posed by larger imported components of headline CPI.…”

Shock-Dependent Exchange Rate Pass-Through: Evidence Based on a Narrative Sign Approach

“…A recent strand of the ERPT literature, pioneered by Shambaugh (2008) and Forbes et al (2018a), shows with a structural vector autoregression (SVAR) model that ERPT is shock-dependent, with the extent of ERPT depending on the types of exogenous shocks that trigger the exchange rate movements. This finding is subsequently confirmed by studies such as Borensztein and Queijo Von Heideken (2016) for six South American countries, Comunale and Kunovac (2017) for the euro area, Corbo et al (2018) for Sweden, Forbes et al (2018b) for twenty-six advanced economies, Comunale (2019) for three Baltic states and Ha et al (2019) for a collection of forty-seven countries around the world.…”

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

“…Based on a sample of forty-seven countries including Thailand, Ha, Stocker and Yilmazkuday (2019) showed that ERPT to inflation varies among countries over time depending on the factors causing exchange rate changes and country characters. Countries pursuing credible inflation targets and flexible exchange rate systems tend to have smaller pass-through ratios.…”