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Exchange Rate Pass-Through to Domestic Prices; Does the Inflationary Environment Matter?

  • Dalia Hakura
  • Ehsan U. Choudhri

The paper tests a hypothesis suggested by Taylor (2000) that a low inflationary environment leads to a low exchange rate pass-through to domestic prices. To test this hypothesis, the paper derives a pass-through relation based on new open economy macroeconomic models. A large database that includes 1979-2000 data for 71 countries is used to estimate this relation. There is strong evidence of a positive and significant association between the pass-through and the average inflation rate across countries and periods. The inflation rate, moreover, dominates other macroeconomic variables in explaining cross-regime differences in the pass-through.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/194.

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Length: 36
Date of creation: 01 Dec 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/194
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  1. Michael B. Devereux & Charles Engel, 2001. "Endogenous Currency of Price Setting in a Dynamic Open Economy Model," NBER Working Papers 8559, National Bureau of Economic Research, Inc.
  2. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2000. "The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates," CEPR Discussion Papers 2511, C.E.P.R. Discussion Papers.
  3. Ilan Goldfajn & Sérgio Ribeiro da Costa Werlang, 2000. "The Pass-through from Depreciation to Inflation: A Panel Study," Working Papers Series 5, Central Bank of Brazil, Research Department.
  4. McCallum, B.T. & Nelson, E., 1998. "Nominal Income Targeting in an Open-Economy Optimizing Model," Papers 644, Stockholm - International Economic Studies.
  5. Paul R. Bergin & Robert C. Feenstra, . "Pricing To Market, Staggered Contracts, And Real Exchange Rate Persistence," Department of Economics 99-01, California Davis - Department of Economics.
  6. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fixing for Your Life," NBER Working Papers 8006, National Bureau of Economic Research, Inc.
  7. Olivier Jeanne & Andrew K. Rose, 2002. "Noise Trading and Exchange Rate Regimes," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 537-569.
  8. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?," NBER Working Papers 8934, National Bureau of Economic Research, Inc.
  9. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
  10. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
  11. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
  12. Susanto Basu, 1994. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," NBER Working Papers 4817, National Bureau of Economic Research, Inc.
  13. J. McCarthy, 1999. "Pass-through of exchange rates and import prices to domestic inflation in some industrialised economies," BIS Working Papers 79, Bank for International Settlements.
  14. Joseph E. Gagnon & Jane E. Ihrig, 2001. "Monetary policy and exchange rate pass-through," International Finance Discussion Papers 704, Board of Governors of the Federal Reserve System (U.S.).
  15. Alan M. Taylor, 2002. "A Century Of Purchasing-Power Parity," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 139-150, February.
  16. Dominique Desruelle & Alessandro Zanello, 1997. "A Primeron the IMF's Information Notice System," IMF Working Papers 97/71, International Monetary Fund.
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