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Exchange rate pass-through: evidence based on vector autoregression with sign restrictions

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  • Lian An
  • Jian Wang

Abstract

We estimate exchange rate pass-through (PT) into import, producer and consumer price indexes for nine OECD countries, using a method proposed by Uhlig (2005). In a Vector Autoregression (VAR) model, we identify the exchange rate shock by imposing restrictions on the signs of impulse responses for a small subset of variables. These restrictions are consistent with a large class of theoretical models and previous empirical findings. We find that exchange rate PT is less than one at both short and long horizons. Among three price indexes, exchange rate PT is greatest for import price index and smallest for consumer price index. In addition, greater exchange rate PT is found in an economy which has a smaller size, higher import share, more persistent exchange rate, more volatile monetary policy, higher inflation rate, and less volatile aggregate demand.

Suggested Citation

  • Lian An & Jian Wang, 2011. "Exchange rate pass-through: evidence based on vector autoregression with sign restrictions," Globalization Institute Working Papers 70, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddgw:70
    Note: Published as: An, Lisa and Jian Wang (2012), "Exchange Rate Pass-through: Evidence Based on Vector Autoregression with Sign Restrictions," Open Economies Review 23 (2): 359-380.
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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