Time-Varying Exchange Rate Pass-Through: Experiences of Some Industrial Countries
34 Pages Posted: 20 Sep 2007
Date Written: March 2006
This paper estimates exchange rate pass-through of six major industrial countries using a time-varying parameter with stochastic volatility model. Exchange rate pass-through is divided into impacts of exchange rate fluctuations to import prices (first-stage pass-through) and those of import price movements to consumer prices (second-stage pass-through). The paper finds that both stages of pass-through have declined over time for all the sample countries. The decline in second-stage pass-through is associated with the emergence of the low and stable inflation environment as well as a rise in import penetration, while the relationship to the inflation environment is weak for first-stage pass-through.
Keywords: exchange rate pass-through, impacts of commodity prices, time-varying parameter, stochastic volatility, Markov Chain Monte Carlo
JEL Classification: F40, E58, C11, E31, F41
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