The Impact of Exchange Rate Volatility on Import Price Index (Cross Country Analysis)

The relationship between exchange rate instability and import price index as a proxy for exchange rate pass-through is one of the important issues in international finance literature. Hence, the main objective of this paper is to investigate the impact of monetary regime and exchange rate volatility on the import price index in two groups of countries with the exchange rate anchor versus inflation targeting monetary regime over the period of 1999-2014. For this purpose, 15 and 43 countries have been selected as countries with exchange rate anchor and inflation targeting monetary regime according to IMF classification. The empirical model has been estimated by applying dynamic panel data approach and GMM estimator for these two groups of countries. Empirical findings of this research show that exchange rate volatility has negative effect on the unit value of imports in the two groups of countries. By results of this paper it can be argued that countries with exchange rate anchor monetary regime and high exchange rate volatility, policy makers and monetary authors should adopt credible monetary policies such as inflation targeting to the control of exchange rate fluctuations on import price level.