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A new look at pass-through

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  • Shambaugh, Jay

Abstract

This paper examines the relationship between exchange rates and prices. Rather than assuming exchange rate changes are exogenous shocks that affect prices, I use a long run restrictions VAR to identify shocks and explore the way domestic prices, import prices and exchange rates react to a variety of shocks. Consumer price pass-through is nearly complete in response to some shocks, but low in response to others. Alternatively, import prices and exchange rates typically respond in the same direction, and pass-through seems quick. This supports the idea that import prices are set in the producer's currency and that lower CPI pass-through is a result of changes in quantities or margins further down the supply chain.

Suggested Citation

  • Shambaugh, Jay, 2008. "A new look at pass-through," Journal of International Money and Finance, Elsevier, vol. 27(4), pages 560-591, June.
    • Handle: RePEc:eee:jimfin:v:27:y:2008:i:4:p:560-591
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