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Exchange rate pass-through and volatility: Impacts on domestic prices in four Asian countries

  • Sek, Siok Kun
  • Kapsalyamova, Zhanna

The paper undertakes a comparative empirical analysis on the effects of shocks on domestic prices in four Asian countries before and after the financial crisis of 1997. We apply two different estimation methodologies, namely a structural VAR and a single equation approach. The results of the two methods are consistent, although the magnitude of the elasticities of the exchange rate pass-through are different due to the inclusion of different variables, lag terms and different assumptions made in both methods. The results show that the degrees of the exchange rate pass-through are different across countries and over time. In most cases, the pass-through rates are incomplete. The degree of the exchange rate pass-through is the highest on import prices, moderate on PPI and is the lowest on CPI. In some cases, the pass-through rates on CPI are even negative. The effect of the import price shock is stronger as compared to that of the exchange rate shock in determining the movement of the domestic prices in these countries. Trade openness has a weak correlation with the degree of the exchange rate pass-through.

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File URL: http://mpra.ub.uni-muenchen.de/11130/1/MPRA_paper_11130.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11130.

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Date of creation: 01 Aug 2008
Date of revision: 26 Oct 2008
Handle: RePEc:pra:mprapa:11130
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  1. Kamps, Annette, 2006. "The euro as invoicing currency in international trade," Working Paper Series 0665, European Central Bank.
  2. 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.
  3. 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.
  4. Frederic S. Mishkin & Miguel A. Savastano, 2000. "Monetary Policy Strategies for Latin America," NBER Working Papers 7617, National Bureau of Economic Research, Inc.
  5. José Manuel Campa & Linda S. Goldberg, 2005. "Exchange Rate Pass-Through into Import Prices," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 679-690, November.
  6. An, Lian, 2006. "Exchange Rate Pass-Through:Evidence Based on Vector Autoregression with Sign Restrictions," MPRA Paper 527, University Library of Munich, Germany.
  7. Hahn, Elke, 2003. "Pass-through of external shocks to euro area inflation," Working Paper Series 0243, European Central Bank.
  8. Sebastian Edwards, 2006. "The Relationship Between Exchange Rates and Inflation Targeting Revisited," NBER Working Papers 12163, National Bureau of Economic Research, Inc.
  9. Takatoshi Ito & Kiyotaka Sato, 2006. "Exchange Rate Changes and Inflation in Post-Crisis Asian Economies: VAR Analysis of the Exchange Rate Pass-Through," CIRJE F-Series CIRJE-F-406, CIRJE, Faculty of Economics, University of Tokyo.
  10. Devereux, Michael B & Lane, Philip R., 2001. "Exchange Rates and Monetary Policy in Emerging Market Economies," CEPR Discussion Papers 2874, C.E.P.R. Discussion Papers.
  11. Dalia Hakura & Ehsan U. Choudhri, 2001. "Exchange Rate Pass-Through to Domestic Prices; Does the Inflationary Environment Matter?," IMF Working Papers 01/194, International Monetary Fund.
  12. Alexander Mihailov, 2003. "Exchange Rate Pass-Through on Prices in Macrodata: A Comparative Sensitivity Analysis," Economics Discussion Papers 568, University of Essex, Department of Economics.
  13. Alexander Mihailov, 2004. "The Empirical Range of Pass-Through in US, German and Japanese Macrodata," Money Macro and Finance (MMF) Research Group Conference 2004 44, Money Macro and Finance Research Group.
  14. Frederic S. Mishkin, 2004. "Can Inflation Targeting Work in Emerging Market Countries?," NBER Working Papers 10646, National Bureau of Economic Research, Inc.
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