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Exchange rate pass-through into import prices revisited: What drives it?

  • Brun-Aguerre, Raphael
  • Fuertes, Ana-Maria
  • Phylaktis, Kate

A large sample of developed and emerging economies is utilized to investigate import exchange rate pass-through. Panel models reveal that various economic aspects of the destination country can explain about one third of the total variation in pass-through elasticities and the remaining variation comes largely in the form of unobserved country-specific effects. Inflation, exchange rate volatility, openness and relative wealth play a clear role as drivers of emerging markets’ pass-through whereas the output gap and protectionism appear influential more generally. Nonlinearity regarding large-versus-small changes in the exchange rate is quite pervasive. Our evidence challenges the widely-held view that pass-through has been universally falling in developed markets and that it is higher for emerging markets. The economic drivers are shown to play a role as out-of-sample predictors of pass-through. The findings confirm pricing-to-market theories and have implications for the optimal conduct of monetary policy.

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

Volume (Year): 31 (2012)
Issue (Month): 4 ()
Pages: 818-844

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Handle: RePEc:eee:jimfin:v:31:y:2012:i:4:p:818-844
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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