On the Pass‐Through of Exchange Rate Fluctuations to the Macroeconomy: Imports in Developing and Advanced Countries

Using annual data, the paper studies the time‐series evidence regarding the allocation of fluctuations in the exchange rate between demand components, real growth and price inflation in a sample of developing and advanced countries. Subsequently, cross‐country correlations establish the relevance of fluctuations in imports to the pass‐through channel of exchange rate fluctuations to economic activity. Further, the evidence evaluates the direct effects of fluctuations in the nominal values of imports on price inflation and real growth. Cross‐country regressions evaluate the effects of variation in the average and variability of exchange rate fluctuations on import growth. Subsequently, variation in indicators of macroeconomic performance (real growth, price inflation and the growth of private consumption and investment) is evaluated with respect to variation in the exchange rate and/or import growth. In developing countries, the evidence indicates the relevance of fluctuations in import growth to the transmission mechanism of exchange rate fluctuations to the macroeconomy. Where this relationship dominates, fluctuations in the exchange rate are no longer significant to the difference in macroeconomic indicators, having controlled for variation in import growth across countries. In advanced countries, import fluctuations may be transmitted to economic activity, further to fluctuations in the exchange rate, in line with variations in terms of trade. Copyright © 2014 John Wiley & Sons, Ltd.