IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Exchange Rate Pass-through in a Small Open Economy

Registered author(s):

    Several small open economies switched to inflation targeting during the 1990s, thereby giving up various forms of exchange rate targeting in favour of flexible exchange rates. Norway did the same early in 2001, and has thereafter experienced highly varying nominal exchange rates with consumer price inflation dropping far below the target during 2003 and 2004. Knowledge of the degree of exchange rate pass-through to import prices and further to consumer prices is essential for inflation targeting. The literature suggests that pass-through is greater to import prices than to consumer prices, which presumably is related to the role of distributors in the economy. We present empirical evidence on these issues for Norway by estimating import price equations and a dynamic model of the distributors pricing behaviour. Using a large-scale macroeconometric model of the Norwegian economy, we find exchange rate pass-through to import prices to be quite rapid in the short run, while pass-through to consumer prices seems to be modest. We show that, among the numerous channels through which the exchange rate operate, trade margins in the distribution sector act as cushions to exchange rate fluctuations, thereby being one of the main important source for the delay in pass-through. In spite of moderate pass-through to consumer prices, we find inflationary effects of exchange rate changes even in the short run, an insight important for inflation targeting central banks.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.ssb.no/a/publikasjoner/pdf/DP/dp429.pdf
    Download Restriction: no

    Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 429.

    as
    in new window

    Length:
    Date of creation: Jun 2005
    Date of revision:
    Handle: RePEc:ssb:dispap:429
    Contact details of provider: Postal: P.O.Box 8131 Dep, N-0033 Oslo, Norway
    Phone: (+47) 21 09 00 00
    Fax: (+47) 21 09 49 73
    Web page: http://www.ssb.no/en/Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Burstein, Ariel T. & Neves, Joao C. & Rebelo, Sergio, 2003. "Distribution costs and real exchange rate dynamics during exchange-rate-based stabilizations," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1189-1214, September.
    2. Maurice Obstfeld and Alan M. Taylor., 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," Center for International and Development Economics Research (CIDER) Working Papers C97-088, University of California at Berkeley.
    3. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, vol. 40(3-5), pages 1007-1021, April.
    4. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    5. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
    6. Feenstra, R.C. & Gagnon, J.E. & Knetter, M.M., 1993. "Market Share and Exchange Rate Pass-Through in World Automobile Trade," Papers 93-14, California Davis - Institute of Governmental Affairs.
    7. 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.
    8. Maurice Obstfeld and Kenneth Rogoff., 1995. "Exchange Rate Dynamics Redux," Center for International and Development Economics Research (CIDER) Working Papers C95-048, University of California at Berkeley.
    9. Hendry, David F. & Ericsson, Neil R., 1991. "Modeling the demand for narrow money in the United Kingdom and the United States," European Economic Review, Elsevier, vol. 35(4), pages 833-881, May.
    10. Kenneth S. Rogoff, 2003. "Globalization and global disinflation," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-112.
    11. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
    12. Chen, Yu-chin & Rogoff, Kenneth, 2003. "Commodity currencies," Journal of International Economics, Elsevier, vol. 60(1), pages 133-160, May.
    13. Charles Engel, 1992. "Real Exchange Rates and Relative Prices: An Empirical Investigation," NBER Working Papers 4231, National Bureau of Economic Research, Inc.
    14. Jordi Gali & Mark Gertler & J. David Lopez-Salido, 2001. "European Inflation Dynamics," NBER Working Papers 8218, National Bureau of Economic Research, Inc.
    15. Jose Campa & Linda S. Goldberg, 1995. "Investment, Pass-Through and Exchange Rates: A Cross-Country Comparison," NBER Working Papers 5139, National Bureau of Economic Research, Inc.
    16. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
    17. Burstein, Ariel Tomas & Eichenbaum, Martin & Rebelo, Sérgio, 2002. "Why Are Rates of Inflation So Low After large Devaluations," CEPR Discussion Papers 3178, C.E.P.R. Discussion Papers.
    18. Charles Engel, 1999. "Local-Currency Pricing and the Choice of Exchange-Rate Regime," Discussion Papers in Economics at the University of Washington 0036, Department of Economics at the University of Washington.
    19. Rogers, J.H. & Jenkins, M.A., 1993. "Haircuts or Hysteresis? Sources of Movements in Real Exchange Rates," Papers 4-93-6, Pennsylvania State - Department of Economics.
    20. Menon, Jayant, 1995. " Exchange Rate Pass-Through," Journal of Economic Surveys, Wiley Blackwell, vol. 9(2), pages 197-231, June.
    21. Charles Engel, 1999. "Accounting for U.S. Real Exchange Rate Changes," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 507-538, June.
    22. Robert-Paul Berben, 2004. "Exchange rate pass-through in the Netherlands: has it changed?," Applied Economics Letters, Taylor & Francis Journals, vol. 11(3), pages 141-143.
    23. Favero, C. & Hendry, D., 1990. "Testing The Lucas Critique: A Review," Economics Series Working Papers 99101, University of Oxford, Department of Economics.
    24. Charles Engel & John H. Rogers, 1999. "Deviations from Purchasing Power Parity:Causes and Welfare Costs," Working Papers 0038, University of Washington, Department of Economics.
    25. Jurgen A. Doornik, 1998. "Approximations To The Asymptotic Distributions Of Cointegration Tests," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 573-593, December.
    26. Biorn, Erik & Jensen, Morten & Reymert, Morten, 1987. "KVARTS - a quarterly model of the Norwegian economy," Economic Modelling, Elsevier, vol. 4(1), pages 77-109, January.
    27. Marston, Richard C., 1990. "Pricing to market in Japanese manufacturing," Journal of International Economics, Elsevier, vol. 29(3-4), pages 217-236, November.
    28. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
    29. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    30. Friberg, Richard, 2001. "Two monies, two markets?: Variability and the option to segment," Journal of International Economics, Elsevier, vol. 55(2), pages 317-327, December.
    31. Paul Krugman, 1986. "Pricing to Market when the Exchange Rate Changes," NBER Working Papers 1926, National Bureau of Economic Research, Inc.
    32. Layard, Richard & Nickell, Stephen, 1986. "Unemployment in Britain," Economica, London School of Economics and Political Science, vol. 53(210(S)), pages S121-69, Supplemen.
    33. Anders Rahbek & Rocco Mosconi, 1999. "Cointegration rank inference with stationary regressors in VAR models," Econometrics Journal, Royal Economic Society, vol. 2(1), pages 76-91.
    34. H. Peter Boswijk & Jean-Pierre Urbain, 1997. "Lagrance-multiplier tersts for weak exogeneity: a synthesis," Econometric Reviews, Taylor & Francis Journals, vol. 16(1), pages 21-38.
    35. Naug, Bjorn & Nymoen, Ragnar, 1996. " Pricing to Market in a Small Open Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(3), pages 329-50.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:ssb:dispap:429. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (J Bruusgaard)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.