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Shocks versus structure: explaining differences in exchange rate pass-through across countries and time

Listed author(s):
  • Forbes, Kristin

    ()

    (Bank of England)

  • Hjortsoe, Ida

    ()

    (Bank of England)

  • Nenova, Tsvetelina

    ()

    (Bank of England)

We show that exchange rate pass-through to consumer prices varies not only across countries, but also over time. Previous literature has highlighted the role of an economy’s ‘structure’ — such as its inflation volatility, inflation rate, use of foreign currency invoicing, and openness — in explaining these variations in pass-through. We use a sample of 26 advanced and emerging economies to show which of these structural variables are significant in explaining not only differences in pass-through across countries, but also over time. The ‘shocks’ leading to exchange rate movements can also explain variations in pass‑through over time. For example, exchange rate movements caused by monetary policy shocks consistently correspond to significantly higher estimates of pass-through than those caused by demand shocks. The role of ‘shocks’ in driving pass-through over time can be as large as that of structural variables, and even larger for some countries. As a result, forecasts predicting how a given exchange rate movement will impact inflation at a specific point in time should take into account not just an economy’s ‘structure’, but also the ‘shocks’.

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Paper provided by Monetary Policy Committee Unit, Bank of England in its series Discussion Papers with number 50.

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Length: 54 pages
Date of creation: 10 Jul 2017
Handle: RePEc:mpc:wpaper:0050
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  13. Mary Amiti & Oleg Itskhoki & Jozef Konings, 2016. "International shocks and domestic prices:How large are strategic complementariti?," Working Paper Research 295, National Bank of Belgium.
  14. Gust, Christopher & Leduc, Sylvain & Vigfusson, Robert, 2010. "Trade integration, competition, and the decline in exchange-rate pass-through," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 309-324, April.
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  17. Forbes, Kristin & Hjortsoe, Ida & Nenova, Tsvetelina, 2015. "The shocks matter: improving our estimates of exchange rate pass-through," Discussion Papers 43, Monetary Policy Committee Unit, Bank of England.
  18. Takatoshi Ito & Kiyotaka Sato, 2008. "Exchange Rate Changes and Inflation in Post-Crisis Asian Economies: Vector Autoregression Analysis of the Exchange Rate Pass-Through," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1407-1438, October.
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  24. repec:hrv:faseco:30703806 is not listed on IDEAS
  25. Liu, Philip & Mumtaz, Haroon & Theophilopoulou, Angeliki, 2011. "International transmission of shocks: a time-varying factor-augmented VAR approach to the open economy," Bank of England working papers 425, Bank of England.
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