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The Pass-through from Depreciation to Inflation: A Panel Study

  • Ilan Goldfajn
  • Sérgio Ribeiro da Costa Werlang

The paper studies the relationship between exchange rate depreciations and inflation using a sample of 71 countries in the period 1980-1998. The main determinants of the extent of inflationary pass-through of the depreciations (appreciations) are the cyclical component of output, the extent of initial overvaluation of the real exchange rate (RER), the initial rate of inflation, and the degree of openness of the economy. The paper finds that the pass-through coefficients increase the larger is the horizon measured, with its peak at 12-months. It also finds that RER misalignment is the most important determinant of inflation for emerging markets while the initial inflation is the most important variable for developed countries. Using the estimated model, the paper predicts somewhat higher inflation than actually observed in several well-known large depreciation cases, even if one takes into account existing measures of exchange rate expectations. This suggests that policy makers should use caution when using past models to predict future inflation in the aftermath of large depreciations.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps05.pdf
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 5.

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Date of creation: Jul 2000
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Handle: RePEc:bcb:wpaper:5
Contact details of provider: Web page: http://www.bcb.gov.br/?english

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  1. Fisher, Eric, 1989. "A model of exchange rate pass-through," Journal of International Economics, Elsevier, vol. 26(1-2), pages 119-137, February.
  2. Campa, Jose Manuel & Goldberg, Linda S, 1999. "Investment, Pass-Through, and Exchange Rates: A Cross-Country Comparison," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 287-314, May.
  3. Cristina T. Terra, 1998. "Openness And Inflation: A New Assessment," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 641-648, May.
  4. Robert C. Feenstra & Jon D. Kendall, 1994. "Passthrough of Exchange Rates and Purchasing Power Parity," NBER Working Papers 4842, National Bureau of Economic Research, Inc.
  5. Rudiger Dornbusch, 1985. "Exchange Rates and Prices," NBER Working Papers 1769, National Bureau of Economic Research, Inc.
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