International Evidence on Shock-Dependent Exchange Rate Pass-Through

39 Pages Posted: 28 Sep 2018

See all articles by Kristin J. Forbes

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Ida Hjortsoe

Bank of England

Tsvetelina Nenova

London Business School - Department of Economics

Date Written: September 24, 2018

Abstract

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

Forbes, Kristin J. and Hjortsoe, Ida Maria and Nenova, Tsvetelina, International Evidence on Shock-Dependent Exchange Rate Pass-Through (September 24, 2018). MIT Sloan Research Paper No. 5522-18. Available at SSRN: https://ssrn.com/abstract=3256352 or http://dx.doi.org/10.2139/ssrn.3256352

Kristin J. Forbes (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Room E62-416
Cambridge, MA 02142
United States
617-253-8996 (Phone)

HOME PAGE: http://web.mit.edu/kjforbes/www

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ida Maria Hjortsoe

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Tsvetelina Nenova

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

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