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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

    (Faculty of Economics, University of Tokyo)

  • Kiyotaka Sato

    (Faculty of Economics, Yokohama National University)

Abstract

The pass-through effects of exchange rate changes on the domestic prices in the East Asian countries are examined using a VAR analysis including several price indices and domestic macroeconomic variables as well as the exchange rate. Results from the VAR analysis show that (1) the degree of exchange rate pass-through to import prices was quite high in the crisis-hit countries; (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's accommodative monetary policy as well as the high degree of the CPI responsiveness to exchange rate changes was important factors that resulted 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 CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-406.

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Length: 46pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:tky:fseres:2006cf406

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  1. Feenstra, Robert C., 1989. "Symmetric pass-through of tariffs and exchange rates under imperfect competition: An empirical test," Journal of International Economics, Elsevier, vol. 27(1-2), pages 25-45, August.
  2. José Manuel Campa & Linda S. Goldberg & José M. González-Mínguez, 2005. "Exchange-Rate Pass-Through to Import Prices in the Euro Area," NBER Working Papers 11632, National Bureau of Economic Research, Inc.
  3. Jonathan McCarthy, 2000. "Pass-through of exchange rates and import prices to domestic inflation in some industrialized economies," Staff Reports 111, Federal Reserve Bank of New York.
  4. Takatoshi Ito & Eiji Ogawa & Yuri Nagataki Sasaki, 1999. "How Did the Dollar Peg Fail in Asia?," NBER Working Papers 6729, National Bureau of Economic Research, Inc.
  5. Ross McLeod, 2003. "Towards improved monetary policy in Indonesia," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 39(3), pages 303-324.
  6. Guglielmo Maria Caporale & Andrea Cipollini & Panicos Demetriades, 2003. "Monetary Policy and the Exchange Rate During the Asian Crisis: Identification Through Heteroscedasticity," CEIS Research Paper 23, Tor Vergata University, CEIS.
  7. Campa, José Manuel & Goldberg, Linda S, 2006. "Distribution Margins, Imported Inputs and the Insensitivity of the CPI to Exchange Rates," CEPR Discussion Papers 5650, C.E.P.R. Discussion Papers.
  8. Todd E. Clark, 1999. "The Responses Of Prices At Different Stages Of Production To Monetary Policy Shocks," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 420-433, August.
  9. Hamid Faruqee, 2004. "Exchange Rate Pass-Through in the Euro Area," IMF Working Papers 04/14, International Monetary Fund.
  10. Campa, José Manuel & Goldberg, Linda S, 2004. "Exchange Rate Pass-Through into Import Prices," CEPR Discussion Papers 4391, C.E.P.R. Discussion Papers.
  11. Giovanni P. Olivei, 2002. "Exchange rates and the prices of manufacturing products imported into the United States," New England Economic Review, Federal Reserve Bank of Boston, issue Q 1, pages 3 - 18.
  12. Hahn, Elke, 2003. "Pass-through of external shocks to euro area inflation," Working Paper Series 0243, European Central Bank.
  13. Marston, Richard C., 1990. "Pricing to market in Japanese manufacturing," Journal of International Economics, Elsevier, vol. 29(3-4), pages 217-236, November.
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