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Monetary policy and exchange rate pass-through This article is a U.S. Government work and is in the public domain in the U.S.A

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  • Joseph E. Gagnon

    (Board of Governors of the Federal Reserve System, USA)

  • Jane Ihrig

    (Board of Governors of the Federal Reserve System, USA)

Abstract

The pass-through of exchange rate changes into domestic inflation appears to have declined in many countries since the 1980s. We develop a theoretical model that attributes the change in the rate of pass-through to increased emphasis on inflation stabilization by many central banks. This hypothesis is tested on 20 industrial countries between 1971 and 2003. We find widespread evidence of a robust and statistically significant link between estimated rates of pass-through and inflation variability. We also find evidence that observed monetary policy behaviour may be a factor in the declining rate of pass-through. Published in 2004 by John Wiley & Sons, Ltd.

Suggested Citation

  • Joseph E. Gagnon & Jane Ihrig, 2004. "Monetary policy and exchange rate pass-through This article is a U.S. Government work and is in the public domain in the U.S.A," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 315-338.
  • Handle: RePEc:ijf:ijfiec:v:9:y:2004:i:4:p:315-338
    DOI: 10.1002/ijfe.253
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    References listed on IDEAS

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    1. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange rate pass-through into import prices: a macro or micro phenomenon?," Staff Reports 149, Federal Reserve Bank of New York.
    2. Ray C. Fair, 2001. "Actual Federal Reserve policy behavior and interest rate rules," Economic Policy Review, Federal Reserve Bank of New York, issue Mar, pages 61-72.
    3. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
    4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    5. Giovanni P. Olivei, 2002. "Exchange rates and the prices of manufacturing products imported into the United States," New England Economic Review, Federal Reserve Bank of Boston, issue Q 1, pages 3-18.
    6. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    7. Ilan Goldfajn & Sérgio Ribeiro da Costa Werlang, 2000. "The Pass-through from Depreciation to Inflation: A Panel Study," Working Papers Series 5, Central Bank of Brazil, Research Department.
    8. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    9. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 127-159.
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