Shock-Dependent Exchange Rate Pass-Through: Evidence Based on a Narrative Sign Approach

49 Pages Posted: 15 Feb 2020

See all articles by Lian An

Lian An

University of North Florida

Mark A. Wynne

Federal Reserve Bank of Dallas

Ren Zhang

Texas State University

Multiple version iconThere are 2 versions of this paper

Date Written: January 15, 2020

Abstract

This paper studies shock-dependent exchange rate pass-through for Japan with a Bayesian structural vector autoregression model. We identify the shocks by complementing the traditional sign and zero restrictions broadly following Forbes(2018) with the narrative sign restrictions related to the Plaza Accord. We find that the narrative sign restrictions are highly informative, and substantially sharpen and even change the inferences of the structural vector autoregression model originally identified with the traditional sign and zero restrictions. Besides, we confirm that there is a significant variation in the exchange rate pass-through across different shocks. Nevertheless, the exogenous exchange rate shock remains the most important driver of exchange rate fluctuations. Finally, we apply our model to "forecast'' the extent of pass-through conditional on certain foreign exchange interventions in 2018. We show with a novel structural scenario analysis that our model can improve the capability of the Japanese government to set policies more appropriately.

Keywords: Exchange Rate Pass-Through, Narrative Sign Restrictions, Structural Scenario Analysis

JEL Classification: E31, F31, F41

Suggested Citation

An, Lian and Wynne, Mark A. and Zhang, Ren, Shock-Dependent Exchange Rate Pass-Through: Evidence Based on a Narrative Sign Approach (January 15, 2020). Available at SSRN: https://ssrn.com/abstract=3480284 or http://dx.doi.org/10.2139/ssrn.3480284

Lian An

University of North Florida ( email )

4567 St. Johns Bluff Road, South
Jacksonville, FL 32224-2645
United States

Mark A. Wynne

Federal Reserve Bank of Dallas ( email )

PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5159 (Phone)
214-922-5194 (Fax)

Ren Zhang (Contact Author)

Texas State University ( email )

Department of Finance and Economics
McCoy College of Business Administration
San Marcos, TX Texas 78666
United States

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