Country and Time Variation in Exchange Rate Pass-Through: What Drives It?

Journal of International Money and Finance 31(4), pp. 818-844

47 Pages Posted: 19 Aug 2011 Last revised: 8 Sep 2012

See all articles by Raphael Brun-Aguerre

Raphael Brun-Aguerre

J.P. Morgan Chase & Co.

Ana-Maria Fuertes

Cass Business School, City University of London

Kate Phylaktis

City University London - Sir John Cass Business School

Date Written: November 16, 2011

Abstract

A large sample of developed and emerging economies is utilized to investigate import pass-through. Panel models reveal that various economic aspects of the destination country can explain about one third of the total variation in pass-through elasticities and the remaining variation comes largely in the form of unobserved country-specific effects. Inflation, exchange rate volatility, openness and relative wealth play a clear role as drivers of emerging markets' pass-through whereas the output gap and protectionism appear influential more generally. Nonlinearity regarding the differential impact of small and large exchange rate changes is quite pervasive. Our evidence challenges the widely-held view that pass-through has been universally falling in developed markets and that it is higher for emerging markets. A forecasting exercise confirms out-of-sample the predictive role of macro and micro factors. The findings confirm pricing-to-market theories and have implications for the optimal conduct of monetary policy.

Keywords: pass-through, exchange rate, asymmetry, prices, emerging markets, protectionism

JEL Classification: F10, F30, F14, F31

Suggested Citation

Brun-Aguerre, Raphael and Fuertes, Ana-Maria and Phylaktis, Kate, Country and Time Variation in Exchange Rate Pass-Through: What Drives It? (November 16, 2011). Journal of International Money and Finance 31(4), pp. 818-844. Available at SSRN: https://ssrn.com/abstract=1912379

Raphael Brun-Aguerre

J.P. Morgan Chase & Co. ( email )

60 Wall St.
New York, NY 10260
United States

Ana-Maria Fuertes (Contact Author)

Cass Business School, City University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 207 477 0186 (Phone)
+44 207 477 8881 (Fax)

HOME PAGE: http://www.city.ac.uk/people/academics/ana-maria-fuertes

Kate Phylaktis

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 70408735 (Phone)
+44 20 70408881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/faculty/k.phylaktis/

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