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Exchange rate pass-through, monetary policy, and variability of exchange rates

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  • Konstantin Styrin

    ()
    (New Economic School)

  • Oleg Zamulin

    ()
    (National Research University – Higher School of Economics)

Abstract

We document that contribution of identified US monetary shock to exchange rate variability differs across currencies and is inversely related to the degree of a country’s US dollar exchange rate pass-through into import prices. We explore this empirical pattern under the assumption that each central bank, when choosing its monetary policy, takes into account in which currency its country’s exports and imports are denominated. The choice of imports invoicing currency will affect both the degree of exchange rate pass-through and the monetary policy response. Different shape of monetary policy reaction function will result in different contribution of monetary shocks to the exchange rate dynamics. We illustrate this mechanism using a simple general equilibrium model.

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Bibliographic Info

Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0178.

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Length: 39 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:cfr:cefirw:w0178

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Keywords: Exchange rate; pass-through; invoicing currency; monetary policy; monetary shocks; variance decomposition;

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 1-48, February.
  2. Gita Gopinath & Oleg Itskhoki & Roberto Rigobon, 2007. "Currency Choice and Exchange Rate Pass-through," NBER Working Papers 13432, National Bureau of Economic Research, Inc.
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