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

  • An, Lian
  • Wang, Jian

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.

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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 70.

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Length: 34 pages
Date of creation: 2011
Date of revision:
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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