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Understanding the Time Variation in Exchange Rate Pass-Through to Import Prices

Author

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  • Rose Cunningham
  • Christian Friedrich
  • Kristina Hess
  • Min Jae Kim

Abstract

In this paper, we analyze the presence of time variation in the pass-through from the nominal effective exchange rate to import prices for 24 advanced economies over the period 1995–2015. In line with earlier studies in the literature, we find substantial heterogeneity in the level of exchange rate pass-through across countries. But, in addition, we show that the dynamics of exchange rate pass-through also differ across countries. Potential explanations for this observation could be of a country-specific nature or could relate to differences in the composition or transmission of global shocks across countries. We then investigate the role of global demand shocks as potential determinants of exchange rate pass-through dynamics in seven advanced economies. We conduct this analysis by running a set of instrumental variable regressions to quantify the contemporaneous exchange rate pass-through that arises from different shocks. Out of the global demand shocks that we examine, we find that oil demand shocks, in particular, are associated with a relatively higher exchange rate pass-through to import prices, while US fiscal policy shocks appear to have the lowest impact.

Suggested Citation

  • Rose Cunningham & Christian Friedrich & Kristina Hess & Min Jae Kim, 2017. "Understanding the Time Variation in Exchange Rate Pass-Through to Import Prices," Discussion Papers 17-12, Bank of Canada.
  • Handle: RePEc:bca:bocadp:17-12
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    References listed on IDEAS

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    More about this item

    Keywords

    Exchange rates; Inflation and prices; International topics; Transmission of monetary policy;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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