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Exchange rate pass-through and volatility: Impacts on domestic prices in four Asian countries

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  • Sek, Siok Kun
  • Kapsalyamova, Zhanna

Abstract

The paper undertakes a comparative empirical analysis on the effects of shocks on domestic prices in four Asian countries before and after the financial crisis of 1997. We apply two different estimation methodologies, namely a structural VAR and a single equation approach. The results of the two methods are consistent, although the magnitude of the elasticities of the exchange rate pass-through are different due to the inclusion of different variables, lag terms and different assumptions made in both methods. The results show that the degrees of the exchange rate pass-through are different across countries and over time. In most cases, the pass-through rates are incomplete. The degree of the exchange rate pass-through is the highest on import prices, moderate on PPI and is the lowest on CPI. In some cases, the pass-through rates on CPI are even negative. The effect of the import price shock is stronger as compared to that of the exchange rate shock in determining the movement of the domestic prices in these countries. Trade openness has a weak correlation with the degree of the exchange rate pass-through.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11130.

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Date of creation: 01 Aug 2008
Date of revision: 26 Oct 2008
Handle: RePEc:pra:mprapa:11130

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Keywords: domestic prices; exchange rate pass-through; SVAR; single equation approach;

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  1. Jonathan McCarthy, 2000. "Pass-through of exchange rates and import prices to domestic inflation in some industrialized economies," Staff Reports, Federal Reserve Bank of New York 111, Federal Reserve Bank of New York.
  2. Sebastian Edwards, 2006. "The Relationship Between Exchange Rates and Inflation Targeting Revisited," NBER Working Papers 12163, National Bureau of Economic Research, Inc.
  3. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?," NBER Working Papers 8934, National Bureau of Economic Research, Inc.
  4. Lian An & Jian Wang, 2011. "Exchange rate pass-through: evidence based on vector autoregression with sign restrictions," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 70, Federal Reserve Bank of Dallas.
  5. Alexander Mihailov, 2009. "Exchange rate pass-through to prices in macrodata: a comparative sensitivity analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 14(4), pages 346-377.
  6. Philip R. Lane & Michael B. Devereux,Juanyi Xu, 2005. "Exchange Rates and Monetary Policy in Emerging Market Economies," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp036, IIIS.
  7. Mishkin, Frederic S. & Savastano, Miguel A., 2001. "Monetary policy strategies for Latin America," Policy Research Working Paper Series 2685, The World Bank.
  8. Kamps, Annette, 2006. "The euro as invoicing currency in international trade," Working Paper Series, European Central Bank 0665, European Central Bank.
  9. José Manuel Campa & Linda S. Goldberg, 2005. "Exchange Rate Pass-Through into Import Prices," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 679-690, November.
  10. Takatoshi Ito & Kiyotaka Sato, 2006. "Exchange Rate Changes and Inflation in Post-Crisis Asian Economies: VAR Analysis of the Exchange Rate Pass-Through," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 06018, Research Institute of Economy, Trade and Industry (RIETI).
  11. 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, Elsevier, vol. 25(4), pages 614-639, June.
  12. Frederic S. Mishkin, 2004. "Can Inflation Targeting Work in Emerging Market Countries?," NBER Working Papers 10646, National Bureau of Economic Research, Inc.
  13. Hahn, Elke, 2003. "Pass-through of external shocks to euro area inflation," Working Paper Series, European Central Bank 0243, European Central Bank.
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Cited by:
  1. Antonio Forte, 2009. "The pass-through effect: a twofold analysis," EERI Research Paper Series EERI_RP_2009_08, Economics and Econometrics Research Institute (EERI), Brussels.

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