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Exchange rate pass-through to domestic prices: Does the inflationary environment matter?

  • Choudhri, Ehsan U.
  • Hakura, Dalia S.

The paper tests a hypothesis suggested by Taylor (2000) that a low inflationary environment leads to a low exchange rate pass-through to domestic prices. To test this hypothesis, the paper derives a pass-through relation based on new open economy macroeconomic models. A large database that includes 1979-2000 data for 71 countries is used to estimate this relation. There is strong evidence of a positive and significant association between the pass-through and the average inflation rate across countries and periods. The inflation rate, moreover, dominates other macroeconomic variables in explaining cross-regime differences in the pass-through.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 25 (2006)
Issue (Month): 4 (June)
Pages: 614-639

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Handle: RePEc:eee:jimfin:v:25:y:2006:i:4:p:614-639
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  8. Paul R. Bergin & Robert C. Feenstra, 1999. "Pricing to Market, Staggered Contracts, and Real Exchange Rate Persistence," NBER Working Papers 7026, National Bureau of Economic Research, Inc.
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