Modelling Exchange Rate Pass-through in Australia, China and India

Abstract

Exchange rate pass-through (ERPT) has attracted attention of many researchers in the last three decades due to the adoption of flexible exchange rate system by many countries. The objectives of this study are to make a comparative study by exploring the literature relating pass-through for import prices and domestic prices in Australia, China and India. In particular, we test whether the exchange rate pass-through to import prices is complete, estimate the pass-through to CPI to investigate whether there is any association between the pass-through and the average inflation rate across these countries. Using a structural VAR model we test the exchange rate pass-through over the period 1990-2011. The impulse responses indicate that exchange rates have less effect in the rising domestic prices in China and India. This will have important policy implication for the monetary authorities.