Exchange Rate Pass-Through to Domestic Prices Under Different Exchange Rate Regimes

There is an immense literature on the effects of exchange rate changes on macroeconomic indicators, specifically on the trade balance, growth, inflation, and overall productivity in open economies. One of the main attempts in the related literature is about ascertaining whether the exchange rate fluctuations alter domestic prices. This possible mechanism is called as the pass-through effect which is getting more important since the argument that exchange rate adjustment is a part of the solution for global rebalancing is empirically well-supported. Starting from this claim, this study purposes to explore whether there is an exchange rate pass-through effect in 19 high-income OECD countries over the period 1990-2015. To this end, using a panel data set of consumer price index, producer price index proxied by wholesale price index, the nominal effective exchange rates, and industrial production presented by the value-added share of industry sectors in gross domestic product, structural vector autoregressive (VAR) and autoregressive distributed lag (ARDL) models are estimated in an unbalanced panel data analysis procedure. Results reveal that exchange rate pass-through effects on the domestic prices are significant but not that strong in both the short-run and the long-run. Expectedly, the pass-through effects tend to diminish over time. The study concludes that policy-makers need to consider policy actions accompanying the exchange rate changes to ensure domestic price stability which consequently interacts with many macroeconomic indicators.

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Conclusions

Currency Politics ◽

10.23943/princeton/9780691173849.003.0008 ◽

2016 ◽

Author(s):

Jeffry A. Frieden

Keyword(s):

Exchange Rate ◽

Exchange Rates ◽

Exchange Rate Policy ◽

Theoretical Argument ◽

Economic Agents ◽

Cross Border ◽

Domestic Prices ◽

Pass Through ◽

Exchange Rate Pass Through ◽

Export Competition

This chapter summarizes key findings. This book makes a simple theoretical argument about the distributional implications of exchange rate policy. It suggests that economic actors with important cross-border interests, exposed to currency volatility, will tend to prefer more stable and predictable exchange rates. It also claims that tradables producers will, all else being equal, tend to prefer a depreciated real exchange rate. These concerns will be tempered by the extent of exchange rate pass-through—that is, the degree to which currency movements affect domestic prices. The analysis in this book shows that countries whose economic agents are more involved in cross-border trade are more likely to fix their exchange rates in order to reduce currency volatility. Countries with large groups susceptible to import or export competition—import-competing manufacturers and export farmers—are more likely to choose flexible exchange rates that allow currency depreciations. Governments facing an election encourage or allow currency appreciation that increases the purchasing power of consumers.

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Asymmetry in Exchange Rate Pass-Through to Consumer Prices: New Perspective from Sub-Saharan African Countries

Economies ◽

10.3390/economies7010005 ◽

2019 ◽

Vol 7 (1) ◽

pp. 5

Author(s):

Diby François Kassi ◽

Dilesha Nawadali Rathnayake ◽

Akadje Jean Roland Edjoukou ◽

Yobouet Thierry Gnangoin ◽

Pierre Axel Louembe ◽

...

Keyword(s):

Exchange Rate ◽

Exchange Rate Regimes ◽

Short Term ◽

Franc Zone ◽

Consumer Prices ◽

Cfa Franc Zone ◽

The Exchange Rate ◽

Sub Saharan ◽

Pass Through ◽

Exchange Rate Pass Through

This paper examines the asymmetrical relationship between exchange rate and consumer prices in 40 sub-Saharan African (SSA) countries from 1990Q1 to 2017Q4. We estimate the exchange rate pass-through (ERPT) to consumer prices for each country by using the nonlinear autoregressive distributed lag (NARDL) framework and dynamic panel techniques robust to cross-sectional dependence. First, our findings suggest an asymmetrical ERPT in the SSA region during the short term, whereas there are mixed results across subregions in the long term. Second, the results of the panel analysis suggest incomplete and significant ERPT to consumer prices in the entire SSA region, which is higher during depreciation of the local currency than after appreciation in the short-term, especially in the CFA Franc zone. Third, we find nonlinear ERPT with respect to the size of the exchange rate. Finally, we find that pass-through is higher in countries with fixed exchange rate regimes (CFA franc zone) in a low inflationary environment than in countries with floating exchange rate regimes and high inflation levels. Pass-through is greater during large exchange rate changes than after small changes. Therefore, the policy implication is to consider these asymmetries and nonlinearities to improve monetary policy’s credibility, enhance trade liberalization, and promote competitive market structures in the SSA region.

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Exchange rate pass-through to domestic prices in Namibia: SVAR evidence

Journal of Economic and Financial Sciences ◽

10.4102/jef.v7i1.132 ◽

2014 ◽

Vol 7 (1) ◽

pp. 89-102 ◽

Cited By ~ 1

Author(s):

Johannes Sheefeni ◽

Matthew Ocran

Keyword(s):

Exchange Rate ◽

Impulse Response ◽

Price Level ◽

Impulse Response Functions ◽

Response Functions ◽

Domestic Prices ◽

Variance Decompositions ◽

The Exchange Rate ◽

Pass Through ◽

Exchange Rate Pass Through

This article investigates exchange rate pass-through to domestic prices in Namibia. The study covers the period of 1993:Q1 – 2011:Q4, and employed the impulse response functions and variance decompositions obtained from a structural vector autoregressive model. The results from the impulse response functions show that there is a high and long-lasting effect from changes in exchange rates to inflation in Namibia, or high exchange rate pass-through into domestic inflation. The results from the forecast error variance decompositions also reflect that changes in the price level evolve endogenously with changes in the exchange rate. The results are in agreement with the findings of the impulse response functions regarding the significant effect of the exchange rate variable on domestic prices (inflation). The results confirm an incomplete pass-through, indicating that the purchasing power parity theory does not hold, with regard to the price level, in the context of Namibia.

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Exchange rate pass-through to domestic prices: the case of Colombia

10.32468/be.254 ◽

2003 ◽

Cited By ~ 5

Author(s):

Peter Rowland

Keyword(s):

Exchange Rate ◽

Domestic Prices ◽

Pass Through ◽

Exchange Rate Pass Through

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The transparency of monetary policy and the effect of exchange rate pass-through

Voprosy Ekonomiki ◽

10.32609/0042-8736-2021-6-32-46 ◽

2021 ◽

pp. 32-46

Author(s):

Ph. S. Kartaev ◽

V. G. Tubdenov

Keyword(s):

Monetary Policy ◽

Exchange Rate ◽

Developing Economies ◽

Verbal Description ◽

Policy Regimes ◽

Consumer Prices ◽

Domestic Prices ◽

Pass Through ◽

The Interest Rate ◽

Exchange Rate Pass Through

The work is devoted to the study of the influence of changes in the transparencyof monetary policy on the effect of exchange rate pass-through in consumer prices. Based on econometric modeling of cross-country panel data, it is shown that an increase in the transparency of communication between the central bank and the population leads to a decrease in the elasticity of domestic prices with respect to the exchange rate in countries that target inflation and adhere to other monetary policy regimes. The effect is observed for both developed and developing economies; it is stronger in the second case. The obtained result can be interpreted as an argument in favor of the advisability of the Bank of Russia transition from a verbal description of its future actions to the publication of a quantitative forecast of the interest rate trajectory.

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