Download This PaperShock-Dependent Exchange Rate Pass-Through: Evidence Based on a Narrative Sign Approach
49 Pages Posted: 29 Apr 2020
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Shock-Dependent Exchange Rate Pass-Through: Evidence Based on a Narrative Sign Approach
Shock-Dependent Exchange Rate Pass-Through: Evidence Based on a Narrative Sign Approach
Date Written: February, 2020
Abstract
This paper studies shock-dependent exchange rate pass-through for Japan with a Bayesian structural vector autoregression model. We identify the shocks by complementing the traditional sign and zero restrictions with narrative sign restrictions related to the Plaza Accord. We find that the narrative sign restrictions are highly informative, and substantially sharpen and even change the inferences of the structural vector autoregression model originally identified with only the traditional sign and zero restrictions. We show that there is a significant variation in the exchange rate pass-through across different shocks. Nevertheless, the exogenous exchange rate shock remains the most important driver of exchange rate fluctuations. Finally, we apply our model to “forecast” the dynamics of the exchange rate and prices conditional on certain foreign exchange interventions in 2018, which provides important policy implications for our shock-identification exercise.
Keywords: Inflation Forecasting, Narrative Sign Restrictions, Exchange Rate Pass-Through, Structural Scenario Analysis
JEL Classification: E31, F31, F41
Suggested Citation: Suggested Citation