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Estimating the Inflationary Effects of Depreciation

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Author Info

  • Tony Richards

    (Reserve Bank of Australia)

  • Glenn Stevens

    (Reserve Bank of Australia)

Abstract

This paper adopts a simple econometric approach to estimate the effects of exchange rate changes on the rate of inflation in Australia. It uses a mark-up model of price determination, in which output costs are determined by input prices. The analysis suggests that imported cost pressures have been more important in the 1980s than in the 1970s. This may be attributable to increasing openness of the Australian economy over this period. In addition, an analysis of import prices finds no evidence of “absorption” by foreign suppliers, and suggests that Australian import prices could have fallen in 1986 if not for the depreciation. This finding is attributable to the falls in the world prices of tradeable goods in 1985 and 1986. Finally, a counterfactual simulation of the estimated equations suggests that the total price effects of the 1985 and 1986 depreciations have been considerably larger than commonly argued.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp8713.

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Date of creation: Dec 1987
Date of revision:
Handle: RePEc:rba:rbardp:rdp8713

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Cited by:
  1. Jacqueline Dwyer & Ricky Lam, 1994. "Explaining Import Price Inflation: A Recent History of Second Stage Pass-through," RBA Research Discussion Papers rdp9407, Reserve Bank of Australia.
  2. Elaine Chung & Marion Kohler & Christine Lewis, 2011. "The Exchange Rate and Consumer Prices," RBA Bulletin, Reserve Bank of Australia, pages 9-16, September.
  3. Jacqueline Dwyer & Christopher Kent & Andrew Pease, 1993. "Exchange Rate Pass-through: The Different Responses of Importers and Exporters," RBA Research Discussion Papers rdp9304, Reserve Bank of Australia.

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