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Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation

  • Eiji Fuji
  • Jeannine Bailliu

This paper investigates the question of whether a transition to a low-inflation environment, induced by a shift in monetary policy, results in a decline in exchange rate pass-through to consumer prices. Our study distinguishes itself from previous empirical work in that we pay particular attention to the identification of changes in the inflation environment, we use a panel-data approach, and we extend our analysis to allow for the possibility that prices may respond asymmetrically to appreciations and depreciations. Using a panel-data set of eleven industrialized countries over the period from 1977 to 2001, we find evidence in support of the hypothesis that exchange rate pass-through declines with a shift to a low-inflation environment. More specifically, our results suggest that pass-through to import, producer and consumer price inflation declined following the inflation stabilization period that occurred in many industrialized countries in the early 1990s, but not following a similar episode that occurred in the 1980s. In extending our investigation to allow for the possibility that prices may respond asymmetrically to appreciations and depreciations, we find evidence that aggregate inflation, across all three price indices that we consider, responds more strongly in the case of a depreciation than it does in the case of an appreciation. However, we find no evidence that this asymmetric behavior changes with a shift to low-inflation environment

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 135.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:135
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