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Monetary Policy Credibility and Exchange Rate Pass-Through

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  • Mr. Yan Carriere-Swallow
  • Bertrand Gruss
  • Mr. Nicolas E Magud
  • Mr. Fabian Valencia

Abstract

A long-standing conjecture in macroeconomics is that recent declines in exchange rate pass-through are in part due to improved monetary policy performance. In a large sample of emerging and advanced economies, we find evidence of a strong link between exchange rate pass-through to consumer prices and the monetary policy regime’s performance in delivering price stability. Using input-output tables, we decompose exchange rate pass-through to consumer prices into a component that reflects the adjustment of imported goods at the border, and another that captures the response of all other prices. We find that price stability and central bank credibility have reduced the second component.

Suggested Citation

  • Mr. Yan Carriere-Swallow & Bertrand Gruss & Mr. Nicolas E Magud & Mr. Fabian Valencia, 2016. "Monetary Policy Credibility and Exchange Rate Pass-Through," IMF Working Papers 2016/240, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2016/240
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    More about this item

    Keywords

    WP; monetary policy; least squares; Exchange rate pass-through; monetary policy credibility; import content; pass-through coefficient; pass-through to consumer prices; pass-through estimate; Consumer prices; Import prices; Inflation; Nominal effective exchange rate; Europe; Asia and Pacific; Global;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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