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Exchange Rate Pass-Through To Domestic Prices: The Case of South Africa

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  • Matthew Kofi Ocran

Abstract

This paper examines the exchange rate pass-through to import, producer and consumer prices in South Africa using monthly data covering the period 2000M1 to 2009M5. The study uses innovation accounting tools (impulse response and variance decomposition) within the framework of an unrestricted VAR to examine the degree of pass-through as well as the relative importance of a number of variables in explaining changes in domestic prices. The key findings suggest that after 1 per cent shock to nominal effective exchange rate, the level of CPI increases by 0.125 per cent, giving a pass-through elasticity of 13 per cent. However, the pass-through elasticity of producer price is 20 per cent after 24 months suggesting that favourable shocks to producer price inflation can have considerable moderating effect on CPI inflation.

Suggested Citation

  • Matthew Kofi Ocran, 2010. "Exchange Rate Pass-Through To Domestic Prices: The Case of South Africa," Prague Economic Papers, University of Economics, Prague, vol. 2010(4), pages 291-306.
  • Handle: RePEc:prg:jnlpep:v:2010:y:2010:i:4:id:378:p:291-306
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    References listed on IDEAS

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    1. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
    2. Jane E. Ihrig & Mario Marazzi & Alexander D. Rothenberg, 2006. "Exchange-rate pass-through in the G-7 countries," International Finance Discussion Papers 851, Board of Governors of the Federal Reserve System (U.S.).
    3. José Manuel Campa & Linda S. Goldberg, 2005. "Exchange Rate Pass-Through into Import Prices," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 679-690, November.
    4. 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.
    5. Li-gang Liu & Andrew Tsang, 2008. "Exchange Rate Pass-Through to Domestic Inflation in Hong Kong," Working Papers 0802, Hong Kong Monetary Authority.
    6. Jonathan McCarthy, 2007. "Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies," Eastern Economic Journal, Eastern Economic Association, vol. 33(4), pages 511-537, Fall.
    7. Takatoshi Ito & Yuri N. Sasaki & Kiyotaka Sato, 2005. "Pass-Through of Exchange Rate Changes and Macroeconomic Shocks to Domestic Inflation in East Asian Countries," Discussion papers 05020, Research Institute of Economy, Trade and Industry (RIETI).
    8. Ashok Bhundia, 2002. "An Empirical Investigation of Exchange Rate Pass-Through in South Africa," IMF Working Papers 02/165, International Monetary Fund.
    9. Hahn, Elke, 2003. "Pass-through of external shocks to euro area inflation," Working Paper Series 243, European Central Bank.
    10. Hamid Faruqee, 2006. "Exchange Rate Pass-Through in the Euro Area," IMF Staff Papers, Palgrave Macmillan, vol. 53(1), pages 1-4.
    11. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
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    Cited by:

    1. Jarmila Zimmermannová & Michal Menšík, 2013. "Ex post analýza zavedení zdanění pevných paliv, zemního plynu a elektřiny
      [Ex-Post Analysis of Solid Fuels, Natural Gas and Electricity Taxation Introduction]
      ," Politická ekonomie, University of Economics, Prague, vol. 2013(1), pages 46-66.
    2. repec:eco:journ1:2017-04-17 is not listed on IDEAS
    3. Erick Lusekelo Mwambuli & Zhang Xianzhi & Zakayo S. Kisava, 2016. "Volatility Spillover Effects Between Stock Prices and Exchange Rates in Emerging Economies: Evidence from Turkey," Business and Economic Research, Macrothink Institute, vol. 6(2), pages 343-359, December.
    4. repec:khe:scajes:v:4:y:2018:i:1:p:60-67 is not listed on IDEAS

    More about this item

    Keywords

    exchange rate; pass-through; domestic prices; VAR; South Africa;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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