Exchange Rate Pass-Through in Emerging Markets

33 Pages Posted: 11 Apr 2007

See all articles by Michele Ca' Zorzi

Michele Ca' Zorzi

European Central Bank (ECB)

Elke Hahn

ifo Institue fur Wirtschaftsforschung

Marcelo Sanchez

European Central Bank (ECB)

Date Written: March 2007

Abstract

This paper examines the degree of Exchange Rate Pass-Through (ERPT) to prices in 12 emerging markets in Asia, Latin America, and Central and Eastern Europe. Our results, based on three alternative vector autoregressive models, partly overturn the conventional wisdom that ERPT into both import and consumer prices is always higher in "emerging" than in "developed" countries. For emerging markets with only one digit inflation (most notably the Asian countries), passthrough to import and consumer prices is found to be low and not very dissimilar from the levels of developed economies. The paper also finds robust evidence for a positive relationship between the degree of the ERPT and inflation, in line with Taylor's hypothesis once two outlier countries (Argentina and Turkey) are excluded from the analysis. Finally, the presence of a positive link between import openness and ERPT, while plausible theoretically, finds only weak empirical support.

Keywords: Exchange Rate Pass-Through, Emerging Markets

JEL Classification: C32, E31

Suggested Citation

Ca' Zorzi, Michele and Hahn, Elke and Sanchez, Marcelo, Exchange Rate Pass-Through in Emerging Markets (March 2007). ECB Working Paper No. 739. Available at SSRN: https://ssrn.com/abstract=970654

Michele Ca' Zorzi (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Elke Hahn

ifo Institue fur Wirtschaftsforschung ( email )

Poschingerstr. 5
Munich
Germany
+49-89-9224-1281 (Phone)
+49-89-9224-1462 (Fax)

Marcelo Sanchez

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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