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Exchange Rate Changes and Inflation in Post-Crisis Asian Economies: VAR Analysis of the Exchange Rate Pass-Through

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  • Takatoshi Ito
  • Kiyotaka Sato

Abstract

Macroeconomic consequences of a large currency depreciation among the crisis-hit Asian economies had varied from one country to another. Inflation did not soar in most Asian countries, including Thailand and Korea, after the exchange rate depreciated during the crisis. Indonesia, however, suffered very high inflation following a very large nominal depreciation of the rupiah. As a result, price competitive advantage by the rupiah depreciation was lost in the real exchange rate terms. The objective of this paper is to examine the pass-through effects of exchange rate changes on the domestic prices in the East Asian economies using a VAR analysis. Main results are as follows: (1) the degree of exchange rate pass-through to import prices was quite high in the crisis-hit economies; (2) the pass-through to CPI was generally low, with a notable exception of Indonesia: and (3) in Indonesia, both the impulse response of monetary policy variables to exchange rate shocks and that of CPI to monetary policy shocks are positive, large, and statistically significant. Thus, Indonesia%u2019s accommodative monetary policy, coupled with the high degree of the CPI responsiveness to exchange rate changes was an important factor in the spiraling effects of domestic price inflation and sharp nominal exchange rate depreciation in the post-crisis period.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12395.

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Date of creation: Jul 2006
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Handle: RePEc:nbr:nberwo:12395

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Cited by:
  1. Qin, Duo & Tan, Tao, 2009. "How much intraregional exchange rate variability could a currency union remove? The case of ASEAN+3," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1793-1803, October.
  2. Forte, Antonio, 2009. "The pass-through effect: a twofold analysis," MPRA Paper 16527, University Library of Munich, Germany.
  3. Carlos Cortinhas, 2007. "Exchange Rate Pass-Through in ASEAN: Implications for the Prospects of Monetary Integration in the Region," NIPE Working Papers 2/2007, NIPE - Universidade do Minho.
  4. Craig R. Parsons & Kiyotaka Sato, 2008. "New estimates of exchange rate pass-through in Japanese exports An earlier version of this paper was presented at the 10th International Convention of the East Asian Economic Association in Beijing, C," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(2), pages 174-183.
  5. Pami Dua & Upasna Gaur, 2009. "Determination of Inflation in an Open Economy Phillips Curve Framework-- The Case of Developed and Developing Asian Countries," Working papers 178, Centre for Development Economics, Delhi School of Economics.
  6. Liew, Freddy, 2012. "Forecasting inflation in Asian economies," MPRA Paper 36781, University Library of Munich, Germany.
  7. Dubravko Mihaljek & Marc Klau, 2008. "Exchange rate pass-through in emerging market economies: what has changed and why?," BIS Papers chapters, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 103-130 Bank for International Settlements.
  8. Sek, Siok Kun & Kapsalyamova, Zhanna, 2008. "Exchange rate pass-through and volatility: Impacts on domestic prices in four Asian countries," MPRA Paper 11130, University Library of Munich, Germany, revised 26 Oct 2008.
  9. Hardiyanto, A.V., 2007. "Daily Rp/USD stochastic volatility and the policy implication lesson," Journal of Asian Economics, Elsevier, vol. 18(1), pages 237-256, February.

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