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Dynamics of exchange rate pass-through: The role of pricing strategies and economic shocks

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  • Shah, Sayar Ahmad
  • Garg, Bhavesh

Abstract

This study investigates exchange rate pass-through under alternative currency-pricing strategies in the presence of economic shocks. Unlike existing studies, it explicitly accounts for how pricing choices and shocks jointly shape exchange rate pass-through dynamics. The results indicate that producer currency pricing produces stronger short-term pass-through due to greater pricing power, though this effect weakens as local currency pricing becomes more prevalent. Moreover, the interaction of shocks indicates that pass-through declines in an inflation-targeting regime. These findings suggest that exchange rate pass-through is not fixed but contingent on the interplay of pricing strategies, nature of shocks, and monetary policy frameworks. Policy implications highlight the advantages of transitioning towards local currency invoicing and adopting timely policy interventions. Coupled with an inflation-targeting framework, such measures help contain inflation, strengthen the effectiveness of monetary policy, and safeguards macroeconomic stability in open economies.

Suggested Citation

  • Shah, Sayar Ahmad & Garg, Bhavesh, 2026. "Dynamics of exchange rate pass-through: The role of pricing strategies and economic shocks," Economic Modelling, Elsevier, vol. 154(C).
    • Handle: RePEc:eee:ecmode:v:154:y:2026:i:c:s0264999325003487
    DOI: 10.1016/j.econmod.2025.107353
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