The exchange rate pass‐through to domestic prices: A meta‐analysis

Abstract

AbstractEstimates of the exchange rate pass‐through vary significantly across studies. Therefore, I conduct a meta‐analysis to understand why estimates differ and provide consensus for the conflicting results. The dataset includes 72 primary studies containing 1219 estimates of the pass‐through from nominal effective exchange rates to consumer prices for 111 countries. Because there are many potential causes of heterogeneity, I use Bayesian model averaging to identify the important ones. I find that results vary mainly due to a combination of country‐specific and methodological characteristics, even though factors such as asymmetry and product‐specific characteristics also play a role. The country‐specific characteristics include trade openness, exchange rate flexibility, economic development status, exchange rate persistence, and commodity dependence. On the other hand, the methodological factors include estimation methods, data characteristics, endogeneity bias, and the researcher's choice of control variables. Finally, I model the exchange rate pass‐through, taking into account asymmetry and the best practices in the literature. I find that a 1% increase in the exchange rate leads to a 0.09% decrease in the consumer price level, whereas a 1% decrease leads to a 0.19% increase.