International Evidence on Shock-Dependent Exchange Rate Pass-Through
39 Pages Posted: 28 Sep 2018
Date Written: September 24, 2018
An extensive empirical literature explores why exchange rate pass-through to prices varies across countries, with limited analysis of why pass-through can also vary meaningfully over time. We develop a methodology to better understand pass-through for a diverse sample of economies by explicitly incorporating changes in economic conditions (the “shocks”) behind currency movements. We find that exchange rate movements caused by monetary policy shocks consistently correspond to significantly higher pass-through than those caused by demand shocks. The underlying shocks are particularly important for understanding the time-series dimension of pass-through, while the standard structural variables are most important for the cross-section.
Keywords: pass-through, exchange rate, price level, inflation, monetary policy
JEL Classification: E31, E37, E52, F47
Suggested Citation: Suggested Citation