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International Evidence on Shock-Dependent Exchange Rate Pass-Through

Author

Listed:
  • Kristin Forbes

    (CEPR and NBER)

  • Ida Hjortsoe

    (Bank of England and CEPR)

  • Tsvetelina Nenova

    (London Business School)

Abstract

We analyse the economic conditions (the “shocks”) behind currency movements and show how that analysis can help address a range of questions, focussing on exchange rate pass-through to prices. We build on a methodology previously developed for the UK and adapt this framework so that it can be applied to a diverse sample of countries using widely available data. The paper provides three examples of how this enriched methodology can be used to provide insights into pass-through and other questions. First, it shows that exchange rate movements caused by monetary policy shocks consistently correspond to significantly higher pass-through than those caused by demand shocks in a cross-section of countries, confirming earlier results for the UK. Second, it shows that the underlying shocks (especially monetary policy shocks) are particularly important for understanding the time-series dimension of pass-through, while the standard structural variables highlighted in the previous literature are most important for the cross-section dimension. Finally, the paper explores how the methodology can be used to shed light on the effects of monetary policy and the debate on “currency wars”: it shows that the role of monetary policy shocks in driving the exchange rate has increased moderately since the global financial crisis in advanced economies.

Suggested Citation

  • Kristin Forbes & Ida Hjortsoe & Tsvetelina Nenova, 2020. "International Evidence on Shock-Dependent Exchange Rate Pass-Through," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(4), pages 721-763, December.
  • Handle: RePEc:pal:imfecr:v:68:y:2020:i:4:d:10.1057_s41308-020-00124-2
    DOI: 10.1057/s41308-020-00124-2
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    More about this item

    Keywords

    Pass-through; Exchange rate; Price level; Inflation; Monetary policy; Currency wars;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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