Estimation of the Exchange Rate Pass-Through: Evidence from Korean Domestic Prices

The purpose of this paper is to measure the exchange rate pass-through to domestic prices by using VAR model, and to estimate the long- and short-run and dynamic coefficients of exchange rate pass-through by building the price behavioral equation, which was set up by the error correction model According to results of VAR model estimation, the impact of exchange rate on import, producer, and consumer prices increased after the Korean financial crisis of 1997-98. And the estimation of the price behavioral equation model also shows that the exchange rate pass-through to consumer prices grew after the financial crisis. It is found that there has existed an asymmetric effect of exchange rate movements on prices, looking at the aspects that the pass-through coefficients in the rising period of exchange rate have been different from those in the falling period. This evidence implies that even if exchange rate will fall right after it rises for a certain period of time, consumer prices will not recover to the original level or it will, on the contrary, rise. Therefore, policy authorities should, on the process of implementation of monetary policy, keep in mind that this empirical evidence can be a restraint factor in pursuing the price stability.