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Understanding changes in exchange rate pass-through

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Yelena Takhtamanova

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Abstract

Recent research suggests that there has been a decline in the extent to which firms “pass through” changes in exchange rates to prices. Beyond providing further evidence in support of this claim, this paper proposes an explanation for the phenomenon. It then presents empirical evidence of a structural break during the 1990s in the relationship between the real exchange rate and CPI inflation for a set of fourteen OECD countries. It is suggested that the recent reduction in the real exchange rate pass-through can be attributed in part to the low-inflation environment of the 1990s.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2008-13.

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Date of creation: 2008
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Handle: RePEc:fip:fedfwp:2008-13

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Keywords: Foreign exchange rates;

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