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

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

Abstract

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.

Suggested Citation

  • Brun-Aguerre, Raphael & Fuertes, Ana-Maria & Phylaktis, Kate, 2012. "Exchange rate pass-through into import prices revisited: What drives it?," Journal of International Money and Finance, Elsevier, vol. 31(4), pages 818-844.
  • Handle: RePEc:eee:jimfin:v:31:y:2012:i:4:p:818-844 DOI: 10.1016/j.jimonfin.2012.01.009
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    Cited by:

    1. Joscha Beckmann & Ansgar Belke & Florian Verheyen, 2013. "Exchange Rate Pass-through into German Import Prices – A Disaggregated Perspective," Ruhr Economic Papers 0427, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    2. Janine Aron & Ronald Macdonald & John Muellbauer, 2014. "Exchange Rate Pass-Through in Developing and Emerging Markets: A Survey of Conceptual, Methodological and Policy Issues, and Selected Empirical Findings," Journal of Development Studies, Taylor & Francis Journals, vol. 50(1), pages 101-143, January.
    3. repec:eee:riibaf:v:41:y:2017:i:c:p:247-259 is not listed on IDEAS
    4. Christophe RAULT & Nidhaleddine BEN CHEIKH, 2017. "Investigating First-Stage Exchange Rate Pass-Through : Sectoral and Macro Evidence from Euro Area Countries," LEO Working Papers / DR LEO 2477, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    5. Eduardo Borensztein & Virginia Queijo Von Heideken, 2016. "Exchange Rate Pass-through in South America: An Overview," IDB Publications (Working Papers) 7779, Inter-American Development Bank.
    6. Joscha Beckmann & Robert Czudaj, 2017. "Effective Exchange Rates, Current Accounts and Global Imbalances," Review of International Economics, Wiley Blackwell, vol. 25(3), pages 500-533, August.
    7. repec:eco:journ1:2017-04-17 is not listed on IDEAS
    8. Eduardo Borensztein & Virginia Queijo Von Heideken, 2016. "Exchange Rate Pass-through in South America: An Overview," IDB Publications (Working Papers) 95196, Inter-American Development Bank.
    9. repec:zbw:rwirep:0427 is not listed on IDEAS
    10. Stefan Schiman & Andreas Reinstaller, 2015. "Analyse der Terms-of-Trade Österreichs," FIW Research Reports series VI-004, FIW.
    11. Devereux, Michael B. & Yetman, James, 2014. "Globalisation, pass-through and the optimal policy response to exchange rates," Journal of International Money and Finance, Elsevier, vol. 49(PA), pages 104-128.
    12. Towbin, Pascal & Weber, Sebastian, 2013. "Limits of floating exchange rates: The role of foreign currency debt and import structure," Journal of Development Economics, Elsevier, pages 179-194.
    13. Naz, Farah & Mohsin, Asma & Zaman, Khalid, 2012. "Exchange rate pass-through in to inflation: New insights in to the cointegration relationship from Pakistan," Economic Modelling, Elsevier, vol. 29(6), pages 2205-2221.
    14. Hendar, 2016. "Inflation mechanisms, expectations and monetary policy in Indonesia," BIS Papers chapters,in: Bank for International Settlements (ed.), Inflation mechanisms, expectations and monetary policy, volume 89, pages 193-203 Bank for International Settlements.
    15. Joscha Beckmann & Ansgar Belke & Florian Verheyen, 2014. "Exchange rate pass-through into German import prices - a disaggregated perspective," Applied Economics, Taylor & Francis Journals, vol. 46(34), pages 4164-4177, December.
    16. Fatma Marrakchi Charfi & Mohamed Kadria, 2016. "Incomplete Exchange Rate Pass-Through Transmission To Prices: An Svar Model For Tunisia," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 11(04), pages 1-23, December.
    17. Rose Cunningham & Christian Friedrich & Kristina Hess & Min Jae Kim, 2017. "Understanding the Time Variation in Exchange Rate Pass-Through to Import Prices," Discussion Papers 17-12, Bank of Canada.
    18. Mallick, Sushanta & Marques, Helena, 2016. "Pricing strategy of emerging market exporters in alternate currency regimes: The role of comparative advantage," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 68-81.
    19. Kiliç, Rehim, 2016. "Regime-dependent exchange-rate pass-through to import prices," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 295-308.
    20. Michael B Devereux & James Yetman, 2014. "Responding to exchange rates in a globalised world," BIS Papers chapters,in: Bank for International Settlements (ed.), Globalisation, inflation and monetary policy in Asia and the Pacific, volume 77, pages 97-117 Bank for International Settlements.
    21. repec:ebl:ecbull:eb-15-00520 is not listed on IDEAS
    22. repec:eee:reveco:v:51:y:2017:i:c:p:245-257 is not listed on IDEAS
    23. Syed Al-Helal Uddin, 2016. "Value-added Trade, Exchange Rate Pass-Through and Trade Elasticity: Revisiting the Trade Competitiveness," 2016 Papers pud11, Job Market Papers.

    More about this item

    Keywords

    Pass-through; Exchange rate; Asymmetry; Prices; Emerging markets; Protectionism;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F30 - International Economics - - International Finance - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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