How Structural Macroeconomic Shocks Can Explain Exchange Rate Pass-Through in Developing Countries? A Common Trend Approach

36 Pages Posted: 12 Feb 2009

See all articles by Barhoumi Karim

Barhoumi Karim

Banque de France - Economic Study and Research Division

Date Written: February 11, 2009

Abstract

This paper investigates the exchange rate pass-through in 12 developing countries during the period 1980-2001 by adopting a new formulation. Rather than considering the traditional approach based on the exogenous exchange rate movement through correlation between exchange rate and prices, we focus on fundamental macroeconomic shocks that affect both exchange rate and prices. In order to do that, we employ long-run restrictions a la Blanchard and Quah (1989) to identify the different shocks through an open economic macroeconomic model (ISLM framework). We use the common trends approach proposed by Warne et al (1992). This allows us to calculate the pass-through as the responses of the exchange rate, CPI and import prices to the supply, the relative demand, the nominal and the foreign prices shocks. We show that the pass-through ratio in developing countries is different when considering different structural shocks.

Keywords: Exchange rate pass-through, Developing countries, Long-run restrictions, Structural VECM, Impulse response functions

JEL Classification: C32, E31, F30

Suggested Citation

karim, barhoumi, How Structural Macroeconomic Shocks Can Explain Exchange Rate Pass-Through in Developing Countries? A Common Trend Approach (February 11, 2009). Available at SSRN: https://ssrn.com/abstract=1341024 or http://dx.doi.org/10.2139/ssrn.1341024

Barhoumi Karim (Contact Author)

Banque de France - Economic Study and Research Division ( email )

31, rue Croix des Petits Champs
75049 Paris Cedex 01
FRANCE

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