The Shocks Matter: Improving Our Estimates of Exchange Rate Pass-Through

Forbes, Kristin J.; Hjortsoe, Ida; Nenova, Tsvetelina

doi:10.2139/ssrn.2691512

Cited by 58 publications

(111 citation statements)

References 17 publications

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“…This may have reflected the limited set of shocks identified in the framework, which were difficult to reconcile with those in most theoretical openeconomy models and which made it hard to apply the framework to estimate pass-through in realtime. Forbes, Hjortsoe and Nenova (2015) develop a more tractable framework using a different set of assumptions to identify shocks that are consistent with theoretical models and more directly applicable to forecasting and policy analysis. However, they only estimate their model for the UK.…”

Section: Discussion Paper No 50 June 2017mentioning

confidence: 99%

“…However, they only estimate their model for the UK. Most recently, Comunale and Kunovac (2017) build on the Forbes et al (2015) framework for selected economies in the euro area.…”

Section: Discussion Paper No 50 June 2017mentioning

confidence: 99%

“…It builds on the framework developed in Forbes, Hjortsoe and Nenova (2015) for the UK, but modifies it to estimate pass-through for the sample of 26 developed and emerging economies conditional on the shock causing the exchange rate movement. The estimates suggest that a given exchange rate movement can be associated with very different price dynamics depending on the shock underlying the exchange rate fluctuation.…”

Section: Discussion Paper No 50 June 2017mentioning

confidence: 99%

“…Instead, these long-sample rates of pass-through are often used as "rules of thumb" for how an exchange rate movement will affect future prices in a specific country. 9 This tendency is surprising given the evidence from a number of countries that pass-through can change notably over time, and even within short periods of time, such as shown for the UK in Forbes, Hjortsoe and Nenova (2015), for Switzerland in Stulz (2007), for the euro area in Comunale and Kunovac (2017), and in the United States from the 1980s to the 1990s.…”

Section: Reduced-form Estimates Of Pass-through: Across Timementioning

confidence: 99%

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Shocks versus Structure: Explaining Differences in Exchange Rate Pass-Through across Countries and Time

2017

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We show that exchange rate pass-through to consumer prices varies not only across countries, but also over time. Previous literature has highlighted the role of an economy's 'structure' -such as its inflation volatility, inflation rate, use of foreign currency invoicing, and openness -in explaining these variations in pass-through. We use a sample of 26 advanced and emerging economies to show which of these structural variables are significant in explaining not only differences in pass-through across countries, but also over time. The 'shocks' leading to exchange rate movements can also explain variations in pass-through over time. For example, exchange rate movements caused by monetary policy shocks consistently correspond to significantly higher estimates of pass-through than those caused by demand shocks. The role of 'shocks' in driving pass-through over time can be as large as that of structural variables, and even larger for some countries. As a result, forecasts predicting how a given exchange rate movement will impact inflation at a specific point in time should take into account not just an economy's 'structure', but also the 'shocks'.

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Section: Discussion Paper No 50 June 2017mentioning

confidence: 99%

“…However, they only estimate their model for the UK. Most recently, Comunale and Kunovac (2017) build on the Forbes et al (2015) framework for selected economies in the euro area.…”

Section: Discussion Paper No 50 June 2017mentioning

confidence: 99%

Section: Discussion Paper No 50 June 2017mentioning

confidence: 99%

Section: Reduced-form Estimates Of Pass-through: Across Timementioning

confidence: 99%

See 2 more Smart Citations

Shocks versus Structure: Explaining Differences in Exchange Rate Pass-Through across Countries and Time

2017

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“…31 For example, see Forbes (2014). 32 See the Bank of England's Inflation Report, February 2017 andForbes, Hjortsoe andNenova (2015). 33 The exception is slack and inflation expectations, which only include contemporaneous regressors.…”

Section: B What Explains Trend Inflation?mentioning

confidence: 99%

A Trendy Approach to UK Inflation Dynamics

2017

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This paper uses a 'trendy' approach to understand UK inflation dynamics. It focuses on the time series to isolate a low-frequency and slow-moving component of inflation (the trend) from deviations around this trend. We find that this slow-moving trend explains a substantial share of UK inflation dynamics. International prices are significantly correlated with the short-term cyclical movements in inflation around its trend, and the exchange rate is significantly correlated with movements in the slow-moving, persistent trend. Other variables emphasized in standard inflation models -such as slack and inflation expectations -may also play some role, but their significance varies and the magnitude of their effects is substantially smaller than for commodity prices and the exchange rate. These results highlight the sensitivity of UK inflation dynamics to events in the rest of the world. They also provide guidance on when deviations of inflation from target are more likely to be temporary, and when (and how quickly) a monetary policy response is appropriate. I. IntroductionUK inflation has been quite volatile over the past decade. Figure 1 shows that consumer price inflation spiked to 5.2% in September 2008, and then fell to 1.1% the next September, before rising back to 5.2% in September 2011. Inflation fell below zero over the course of 2015, and then rose quickly to 2.9% in May 2017. Moreover, some of these deviations of inflation from the 2% target have lasted for substantial periods of time.1 For example, inflation was at or above 3% for 28 months from January 2010 through April 2012, and at or below 1% for 24 months from November 2014 through October 2016. In both cases, inflation deviated from today's 2% target by over 1% (as shown in the shaded area of the Figure), and these deviations required the Governor of the Bank of England to write a series of letters to the Chancellor. In its May 2017 Inflation Report, the Bank of England forecast that inflation would remain above its 2% target for its entire 3-year forecast horizon. Figure 1: Headline and Core CPI InflationSee Appendix Figure 1 for more information on the data and sources. "Current target" is the Bank of England's inflation target of 2% for HCPI. Data is monthly. HCPI is headline CPI and CCPI is core CPI.What is driving these sharp-and often prolonged-movements in inflation away from 2% 2 versus domestic variables? This paper attempts to answer these questions for the United Kingdom, using a framework that has been successful in understanding inflation dynamics in the US but not carefully applied to the UK. The analysis not only helps improve our understanding of UK inflation dynamics, but also provides important insights for when and how quickly monetary policy should respond to deviations of inflation from target.An extensive academic literature attempts to understand inflation dynamics. Much of this literature is grounded in a DSGE framework that models a complex set of structural relationships to understand the cyclical variation in inflat...

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Determinants and Implications of Low Global Inflation Rates

Berganza

Borrallo

Río

2018

Financial and Monetary Policy Studies

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In this paper we look at global infl ation trends over the last decade and try to disentangle factors that could explain the ultra-low levels of infl ation during the recovery from the Great Recession. We review the literature on the subject, which points at possible structural shifts in price and wage setting processes in recent decades, such as infl ation's reduced cyclical sensitivity to domestic economic slack, a bigger role being played by forward-looking infl ation expectations, and the increased importance of global factors. We then test empirically whether changes in the coeffi cients of the Phillips curve in the wake of the global fi nancial crisis can explain the behaviour of infl ation over this period for a large group of advanced economies. Our results show a wide range of variation between countries, and in some cases the fi ndings are insuffi ciently robust to offer a satisfactory explanation of the recent course of infl ation. Nevertheless, the persistence of infl ation and the increased importance of backward-looking infl ation expectations in some countries may pose risks for infl ation-expectation anchoring and central bank credibility. Finally, we review the adverse effects on the real economy of ultra-low infl ation over an extended period and analyse the policy options for addressing this problem.

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The Shocks Matter: Improving Our Estimates of Exchange Rate Pass-Through

Cited by 58 publications

References 17 publications

Shocks versus Structure: Explaining Differences in Exchange Rate Pass-Through across Countries and Time

Shocks versus Structure: Explaining Differences in Exchange Rate Pass-Through across Countries and Time

A Trendy Approach to UK Inflation Dynamics

Determinants and Implications of Low Global Inflation Rates

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