Exchange Rate Pass-Through to Domestic Prices: Does the Inflationary Environment Matter?
36 Pages Posted: 6 Feb 2006
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: Suggested Citation
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