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Not All Exchange Rate Movements Are Alike : Exchange Rate Persistence and Pass-Through to Consumer Prices

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  • Shirota, Toyoichiro

Abstract

This study develops a framework to identify persistent and transitory shocks in exchange-rate movements and to estimate the shock-specific exchange-rate pass-through to domestic prices. The framework combines a dataset of a long time series of exchange-rate forecasts since the 1980s with a range restriction that is a natural generalization of the standard sign restriction. The empirical results show that exchange rate pass-through is higher when a persistent shock dominates exchange-rate movements. The composition of persistent and transitory shocks varies over time. This study asserts that time variations of exchange rate pass-through are at least partly attributable to differences in shock-specific pass-through rates and variations in the composition of shocks over time. Applying our identification procedure to disaggregated prices of the CPI, we also find that a correlation between pass-through coefficients and frequencies of price adjustments is shock dependent. Specifically, the positive correlation, which is reported in Gopinath and Itskhoki [2010], disappears, when exchange-rate movements are transitory.

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  • Shirota, Toyoichiro, 2017. "Not All Exchange Rate Movements Are Alike : Exchange Rate Persistence and Pass-Through to Consumer Prices," Discussion paper series. A 311, Graduate School of Economics and Business Administration, Hokkaido University.
    • Handle: RePEc:hok:dpaper:311
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    File URL: http://hdl.handle.net/2115/67120
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    File URL: https://eprints.lib.hokudai.ac.jp/dspace/bitstream/2115/67120/1/DPA311.pdf
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    Keywords

    exchange-rate pass-through; exchange-rate persistence; range restriction; survey expectation;
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