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The Pass-through from Depreciation to Inflation: A Panel Study

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Author Info

  • Ilan Goldfajn
  • Sérgio Ribeiro da Costa Werlang

Abstract

The paper studies the relationship between exchange rate depreciations and inflation using a sample of 71 countries in the period 1980-1998. The main determinants of the extent of inflationary pass-through of the depreciations (appreciations) are the cyclical component of output, the extent of initial overvaluation of the real exchange rate (RER), the initial rate of inflation, and the degree of openness of the economy. The paper finds that the pass-through coefficients increase the larger is the horizon measured, with its peak at 12-months. It also finds that RER misalignment is the most important determinant of inflation for emerging markets while the initial inflation is the most important variable for developed countries. Using the estimated model, the paper predicts somewhat higher inflation than actually observed in several well-known large depreciation cases, even if one takes into account existing measures of exchange rate expectations. This suggests that policy makers should use caution when using past models to predict future inflation in the aftermath of large depreciations.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps05.pdf
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Bibliographic Info

Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 5.

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Date of creation: Jul 2000
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Handle: RePEc:bcb:wpaper:5

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Web page: http://www.bcb.gov.br/?english

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  1. Cristina T. Terra, 1998. "Openness And Inflation: A New Assessment," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 641-648, May.
  2. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
  3. Jose Campa & Linda S. Goldberg, 1996. "Investment, pass-through, and exchange rates: a cross-country comparison," Staff Reports 14, Federal Reserve Bank of New York.
  4. Feenstra, R.C. & Kendall, J.D., 1994. "Pass-Through of Exchange Rates and Purchasing Power Parity," Papers 1994-06, Tasmania - Department of Economics.
  5. Fisher, Eric, 1989. "A model of exchange rate pass-through," Journal of International Economics, Elsevier, vol. 26(1-2), pages 119-137, February.
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  1. QED 28: La Presidenta e gli economisti a cornu Epistolae ac Evangelii
    by Alberto Bagnai in Goofynomics on 2014-01-25 11:43:00
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