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Pass-through of exchange rates and import prices to domestic inflation in some industrialized economies

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Jonathan McCarthy

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Abstract

This paper examines the impact of exchange rates and import prices on the domestic producer price index and consumer price index in selected industrialized economies. The empirical model is a vector autoregression incorporating a distribution chain of pricing. When the model is estimated over the post-Bretton Woods era, impulse responses indicate that exchange rates have a modest effect on domestic price inflation while import prices have a stronger effect. Pass-through is larger in countries with a larger import share and more persistent exchange rates and import prices. Over 1996-98, these external factors have had a sizable disinflationary effect in many of the countries, but not in the United States. Estimating the model using post-1982 data has little effect on these conclusions.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 111.

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Date of creation: 2000
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Handle: RePEc:fip:fednsr:111

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Keywords: Inflation (Finance) Foreign exchange rates

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