Inflation and Exchange Rate Pass-Through

42 Pages Posted: 26 Mar 2019

See all articles by Jongrim Ha

Jongrim Ha

World Bank

Marc Stocker

World Bank

Hakan Yilmazkuday

Florida International University (FIU) - Department of Economics

Date Written: March 13, 2019

Abstract

The degree to which domestic prices adjust to exchange rate movements is key to understanding inflation dynamics, and hence to guiding monetary policy. However, the exchange rate pass-through to inflation varies considerably across countries and over time. By estimating structural factor-augmented vector-autoregressive models for 47 countries, this paper brings to light two fundamental factors accounting for these variations: the nature of the shock triggering currency movements and country-specific characteristics. The empirical results in this paper are three-fold. First, an empirical investigation demonstrates that different domestic and global shocks can be associated with widely different pass-through ratios. Second, country characteristics matter, including policy frameworks that govern monetary policy responses, as well as other structural features that affect an economy's sensitivity to currency fluctuations. Pass-through ratios tend to be lower in countries that combine flexible exchange rate regimes and credible inflation targets. Finally, the empirical results suggest that central bank independence can greatly facilitate the task of stabilizing inflation following large currency movements and allows fuller use of the exchange rate as a buffer against external shocks.

Keywords: Inflation, Macroeconomic Management, Financial Structures, International Trade and Trade Rules, Trade and Services

Suggested Citation

Ha, Jongrim and Stocker, Marc and Yilmazkuday, Hakan, Inflation and Exchange Rate Pass-Through (March 13, 2019). World Bank Policy Research Working Paper No. 8780, Available at SSRN: https://ssrn.com/abstract=3360138

Jongrim Ha (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Marc Stocker

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Hakan Yilmazkuday

Florida International University (FIU) - Department of Economics ( email )

11200 SW 8th Street
Miami, FL 33199
United States

HOME PAGE: http://faculty.fiu.edu/~hyilmazk/

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