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Exchange Rate Pass-Through and Monetary Policy in South Africa

48 Pages Posted: 18 Jan 2011  

Janine Aron

University of Oxford - Department of Economics

Greg Farrell

Government of the Republic of South Africa - South African Reserve Bank; University of the Witwatersrand

John Muellbauer

University of Oxford - Department of Economics; Centre for Economic Policy Research (CEPR)

Peter J. N. Sinclair

University of Birmingham - Department of Economics

Date Written: December 2010

Abstract

Understanding how import prices adjust to exchange rates helps anticipate inflation effects and monetary policy responses. This paper examines exchange rate pass-through to the monthly import price index in South Africa during 1980-2009. A methodological innovation allows various short-run pass-through estimates to be calculated simply without recourse to a full structural model, yet without neglecting the long-run relationships between prices or the effects of previous import price changes, and controlling for domestic as well as foreign costs. Pass-through is incomplete at about 50 percent within a year and 30 percent in six months, averaging over the sample. Johansen analysis of a cointegrated system using impulse response functions largely supports these short-run results, but as it includes feedback effects, implies lower pass-through for exogenous exchange rate shocks. Equilibrium pass-through, ignoring feedback effects, is around 75 percent. Shifts in pass-through with trade and capital account liberalisation in the 1990s are explored. There is evidence of slower pass-through under inflation targeting when account is taken of temporary shifts to foreign currency invoicing or increased hedging after large exchange rate shocks in the period. Further, pass-through is found to decline with recent exchange rate volatility and there is evidence for asymmetry, with greater pass-though occurring for small appreciations.

Keywords: asymmetic pass-through, exchange rate pass-through, exchange rate volatility, falling pass-through, import prices, monetary policy, South Africa, trade openness

JEL Classification: C22, C32, C51, C52, E3, E52, F13

Suggested Citation

Aron, Janine and Farrell, Greg and Muellbauer, John and Sinclair, Peter J. N., Exchange Rate Pass-Through and Monetary Policy in South Africa (December 2010). CEPR Discussion Paper No. DP8153. Available at SSRN: https://ssrn.com/abstract=1742688

Janine Aron (Contact Author)

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom
+44 1865 271 084 (Phone)
+44 1865 271 094 (Fax)

Greg Farrell

Government of the Republic of South Africa - South African Reserve Bank

Financial Stability Unit
BSD
Pretoria
South Africa

University of the Witwatersrand ( email )

1 Jan Smuts Avenue
Johannesburg, Gauteng 2000
South Africa

John Muellbauer

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom
+44 1865 278 583 (Phone)
+44 1865 278 557 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Peter J. N. Sinclair

University of Birmingham - Department of Economics ( email )

Economics Department
Birmingham, B15 2TT
United Kingdom

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