Exchange Rate Pass-through to Import Prices, and Monetary Policy in South Africa

Abstract

Understanding how import prices adjust to exchange rates helps anticipate inflation effects and monetary policy responses. This article examines exchange rate pass-through to the monthly import price index in South Africa during 1980–2009. Short-horizon pass-through estimates are calculated using both single equation equilibrium correction models and systems (Johansen) models, controlling for both domestic and foreign costs. Average pass-through is incomplete at about 50 per cent within a year and 30 per cent in six months, and in the long-run, from the Johansen analysis including feedback effects, is about 55 per cent. There is evidence of slower pass-through under inflation targeting; pass-through is found to decline with recent exchange rate volatility and there is evidence for asymmetry, with greater pass-through occurring for small appreciations.