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Long-Term Exchange Rate Pass-Through to Prices

Author

Listed:
  • Aleksandr Eliseev

    (Bank of Russia; HSE University)

  • Anna Novak

    (Bank of Russia)

  • Andrey Shulgin

    (Bank of Russia)

Abstract

Empirical research shows that the short-term exchange rate pass-through to prices is quite small. However, can we extrapolate this conclusion to the long term? Our research suggests that the long-term exchange rate pass-through to prices is close to complete. We show this using the Bayesian method to estimate the static general equilibrium model with two effects of real price rigidity: the effect of distribution costs for tradable goods and the ad hoc capture of market share effect. The innovation to the empirical estimation of the model is that it is based on the long-term data for 2012–2018 and is performed in two stages. At the first stage, the intensity of the distribution cost effect is estimated on the statistics for 80 regions of Russia. At the second stage, we estimate elasticity parameters that allow us to calculate the long-term exchange rate pass-through to prices. The total exchange rate pass-through turns out to be almost complete and amounts in, for the basic specification, to 98.5% in the long term (more than five years).

Suggested Citation

  • Aleksandr Eliseev & Anna Novak & Andrey Shulgin, 2023. "Long-Term Exchange Rate Pass-Through to Prices," Russian Journal of Money and Finance, Bank of Russia, vol. 82(2), pages 21-51, June.
    • Handle: RePEc:bkr:journl:v:82:y:2023:i:2:p:21-51
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    incomplete exchange rate pass-through; real price rigidity; distribution margin; capture of market share effect; Balassa–Samuelson effect;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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