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Exchange Rate Pass-Through: Evidence Based on Vector Autoregression with Sign Restrictions

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  • Lian An

    ()

  • Jian Wang

    ()

Abstract

Abstract: This paper provides cross-country and time-series evidence on the extent of exchange rate pass-through at different stages of distribution - import prices, producer prices and consumer prices - for eight major industrial countries: United States, Japan, Canada, Italy, UK, Finland, Sweden and Spain. The analysis is based on a vector autoregreesion (VAR) model that includes the distribution chain of pricing. Instead of the conventional choleski decomposition as used in the literature, I propose to identify the exchange rate shock by the more recent sign restriction approach. For the first time in the literature, estimates of pass-through based on the sign restriction procedure are provided. I find exchange rate pass-through incomplete in many horizons, though complete pass-through is observed occasionally. The degree of pass-through declines and time needed for complete pass-through lengthens along the distribution chain. Furthermore, I find that a greater pass-through coefficient is associated with an economy that is smaller in size with higher import shares, more persistent and less volatile exchange rates, more volatile monetary shocks, higher inflation rate, and less volatile GDP.

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File URL: http://hdl.handle.net/10.1007/s11079-010-9195-8
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 23 (2012)
Issue (Month): 2 (April)
Pages: 359-380

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Handle: RePEc:kap:openec:v:23:y:2012:i:2:p:359-380

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: Exchange rate pass-through; Vector autoregression; Sign restrictions; F31; F41;

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References

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Citations

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Cited by:
  1. Bogdan Cozmanca & Florentina Manea, 2009. "Exchange Rate Pass-Through into Romanian Price Indices: A VAR Approach," Advances in Economic and Financial Research - DOFIN Working Paper Series 34, Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB.
  2. Renee Fry & Adrian Pagan, 2010. "Sign Restrictions in Structural Vector Autoregressions: A Critical Review," NCER Working Paper Series 57, National Centre for Econometric Research.
  3. Naa Akofio-Sowah, 2009. "Is There a Link Between Exchange Rate Pass-Through and the Monetary Regime: Evidence from Sub-Saharan Africa and Latin America," International Advances in Economic Research, Springer, vol. 15(3), pages 296-309, August.
  4. Sek, Siok Kun & Kapsalyamova, Zhanna, 2008. "Exchange rate pass-through and volatility: Impacts on domestic prices in four Asian countries," MPRA Paper 11130, University Library of Munich, Germany, revised 26 Oct 2008.
  5. García-Solanes, José & Torrejón-Flores, Fernando, 2010. "Devaluation and pass-through in indebted and risky economies," International Review of Economics & Finance, Elsevier, vol. 19(1), pages 36-45, January.

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