International Evidence on Shock-Dependent Exchange Rate Pass-Through

Abstract

We analyse the economic conditions (the "shocks") behind currency movements and show how that analysis can help address a range of questions, focussing on exchange rate passthrough to prices. We build on a methodology previously developed for the United Kingdom and adapt this framework so that it can be applied to a diverse sample of countries using widely available data. The paper provides three examples of how this enriched methodology can be used to provide insights on pass-through and other questions. First, it shows that exchange rate movements caused by monetary policy shocks consistently correspond to significantly higher pass-through than those caused by demand shocks in a cross-section of countries, confirming earlier results for the UK. Second, it shows that the underlying shocks (especially monetary policy shocks) are particularly important for understanding the time-series dimension of pass-through, while the standard structural variables highlighted in previous literature are most important for the cross-section dimension. Finally, the paper explores how the methodology can be used to shed light on the effects of monetary policy and the debate on "currency wars": it shows that the role of monetary policy shocks in driving the exchange rate has increased moderately since the global financial crisis in advanced economies.

State-Dependent Exchange Rate Pass-Through

“…The pass-through coefficient is positive and significant by the fifth month, reaching 0.47 after one year. This compares to the average pass-through coefficient from Figure 1 of 0.16 at the same horizon, and is consistent with the finding of Forbes, Hjortsoe, and Nenova (2020) that monetary policy shocks are associated with significantly higher pass-through in a cross-section of countries.…”

Understanding the global drivers of inflation: How important are oil prices?

“…We identify the shocks using sign restrictions as in studies by Charnavoki and Dolado (2014) and Forbes et al (2018Forbes et al ( , 2020. Postulating that 𝐵𝐵 0 −1 in our model has a recursive structure such that the reduced form errors can be decomposed according to 𝑢𝑢 𝑡𝑡 = 𝐵𝐵 0 −1 𝜀𝜀 𝑡𝑡 , the sign restrictions that are imposed over the first two quarters can be written as follows: where * stands for an unrestricted initial response.…”

Exchange Rate Pass-Through in Emerging Asia and Exposure to External Shocks

“…The nature of the exogenous shock has been found to be an important consideration in a range of other related papers that focus on shock-dependent ERPT (e.g. Forbes et al (2020) for 26 advanced and emerging economies; Comunale (2019) for the Baltic region; Comunale and Kunovac (2017) in the case of the euro area; and Borensztein, Queijo Von Heideken, et al (2016) in the case of Latin America). Our paper builds on these works using a TVP-SVAR to examine the responsiveness of domestic prices against four different types of shocks.…”