Exchange Rate Pass-Through to Domestic Prices: Does the Inflationary Environment Matter?

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Exchange Rate Pass-Through to Domestic Prices: Does the Inflationary Environment Matter?

Author Info

Dalia Hakura
Ehsan U. Choudhri

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Abstract

The paper tests a hypothesis suggested by Taylor (2000) that a low inflationary environment leads to a low exchange rate pass-through to domestic prices. To test this hypothesis, the paper derives a pass-through relation based on new open economy macroeconomic models. A large database that includes 1979-2000 data for 71 countries is used to estimate this relation. There is strong evidence of a positive and significant association between the pass-through and the average inflation rate across countries and periods. The inflation rate, moreover, dominates other macroeconomic variables in explaining cross-regime differences in the pass-through.

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Publisher Info
Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/194.

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Length: 36 pages
Date of creation: 20 Dec 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/194

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Article
- Choudhri, Ehsan U. & Hakura, Dalia S., 2006. "Exchange rate pass-through to domestic prices: Does the inflationary environment matter?," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 614-639, June. [Downloadable!] (restricted)

References listed on IDEAS
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