Exchange Rate Pass-Through to Domestic Prices: Does the Inflationary Environment Matter?

36 Pages Posted: 6 Feb 2006

See all articles by Ehsan U. Choudhri

Ehsan U. Choudhri

Carleton University - Department of Economics

Dalia Hakura

International Monetary Fund (IMF)

Date Written: December 2001

Abstract

The paper tests a hypothesis suggested by Taylor (2000) that a low inflationary environment leads to a low exchange rate pass-through to domestic prices. To test this hypothesis, the paper derives a pass-through relation based on new open economy macroeconomic models. A large database that includes 1979-2000 data for 71 countries is used to estimate this relation. There is strong evidence of a positive and significant association between the pass-through and the average inflation rate across countries and periods. The inflation rate, moreover, dominates other macroeconomic variables in explaining cross-regime differences in the pass-through.

Keywords: Pass-through, inflation, exchange rate

JEL Classification: F41, E31, E52

Suggested Citation

Choudhri, Ehsan U. and Hakura, Dalia, Exchange Rate Pass-Through to Domestic Prices: Does the Inflationary Environment Matter? (December 2001). IMF Working Paper No. 01/194, Available at SSRN: https://ssrn.com/abstract=880310

Ehsan U. Choudhri (Contact Author)

Carleton University - Department of Economics ( email )

1125 Colonel By Drive
Ottawa, Ontario
Canada

Dalia Hakura

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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