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

Author

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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.

Suggested Citation

  • Konstantin Styrin & Oleg Zamulin, 2012. "Exchange rate pass-through, monetary policy, and variability of exchange rates," Working Papers w0178, Center for Economic and Financial Research (CEFIR).
    • Handle: RePEc:cfr:cefirw:w0178
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    References listed on IDEAS

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    Cited by:

    1. Wanicha Direkudomsak, 2016. "Inflation dynamics and inflation expectations in Thailand," BIS Papers chapters, in: Bank for International Settlements (ed.), Inflation mechanisms, expectations and monetary policy, volume 89, pages 349-360, Bank for International Settlements.
    2. Pym Manopimoke & Wanicha Direkudomsak, 2015. "Thai Inflation Dynamics in a Globalized Economy," PIER Discussion Papers 11., Puey Ungphakorn Institute for Economic Research, revised Nov 2015.
    3. Pym Manopimoke & Wanicha Direkudomsak, 2015. "Thai Inflation Dynamics in a Globalized Economy," PIER Discussion Papers 11, Puey Ungphakorn Institute for Economic Research.

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    More about this item

    Keywords

    Exchange rate; pass-through; invoicing currency; monetary policy; monetary shocks; variance decomposition;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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