Abstract
The paper explores the link between the inflationary environment and the size of the exchange rate pass-through (ERPT) into domestic prices, as inflation descends from an extreme, second highest and second longest hyperinflation in the 20th century, to high and then moderate inflation in Serbia. We found that ERPT decreases with a decline in the inflation level, variability and persistence, thus supplementing findings previously acquired in panel studies across countries. Our findings can be explained by surging empirical evidence on state contingent behavior of pricing, which indicates a sharp increase in the frequency of price adjustment as one moves from moderate, via high to hyperinflation, suggesting that the degree of price rigidities is a key determinant of the size and speed of ERPT. ERPT estimates are embedded in careful analysis of inflation episodes in Serbia, showing that hyper and high inflation episodes subscribe to the same, fiscal explanation, as opposed to the moderate inflation ones, where supply and demand shocks have been the main inflation drivers.
Highlights
This paper examines the link between the inflationary environment and the size of the exchange rate pass-through (ERPT) into domestic prices, across extremely diverse inflationary episodes and explores whether the size of ERPT could be explained by the related changes in the pace of price adjustment
We have found that the size and the speed of ERPT drops as inflation descends across episodes of extreme hyperinflation via high inflation to a moderate one, in a single country - Serbia
We found that ERPT decreases with a decline in the inflation level, variability and persistence
Summary
The paper draws on three strands of recent research. First, empirical evidence has been supplied showing that ERPT varies with the level, variability and persistence of inflation and currency depreciation. Gagnon and Jane Ihrig (2004) examined the effects of inflation level and variability on the size of passthrough in a panel of 20 industrial countries, finding that both factors affect the passthrough coefficient, inflation variability explains it better than the inflation level does Their investigation into whether a switch to a more stable monetary regime, and in particular the adoption of inflation targeting, lends to a decline in pass-through received support. ShangJin Wei (2005) found, among other things, that pass-through is significantly higher during periods of high inflation, and that decreasing inflation in the 1990s can account for the fall in pass-through They obtained that the monetary environment in developing countries is important in explaining the decline of pass-through into domestic prices. Michael Devereux and James Yetman (2010) found in a large sample of developing and developed countries that ERPT increases with inflation level and variability and exchange rate variability. Under high inflation prices become less sticky and the exchange rate shock should faster spillover into price level, leading to swift/large ERPT
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
