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Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation

  • Jeannine Bailliu
  • Eiji Fujii

This paper investigates the question of whether a transition to a low-inflation environment, induced by a shift in monetary policy, results in a decline in the degree of pass-through of exchange rate movements to consumer prices. It differs from previous empirical work in its focus on the identification of changes in the inflation environment and its use of a panel-data approach. Evidence from a panel-data set of 11 industrialized countries over the period from 1977 to 2001, supports the hypothesis that exchange rate pass-through declines with a shift to a low-inflation environment brought about by a change in the monetary policy regime. More specifically, the results suggest that pass-through to import, producer, and consumer price inflation declined following the inflation stabilization that occurred in many industrialized countries in the early 1990s but did not decline following a similar episode in the 1980s. Several potential explanations for this finding are discussed, including the possibility that changes in the monetary policy regimes implemented in the 1990s were perceived as more credible than those carried out in the 1980s, and the possibility that the credibility of the new monetary policy regimes was acquired over time.

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Paper provided by Bank of Canada in its series Staff Working Papers with number 04-21.

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Length: 49 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:bca:bocawp:04-21
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