Degree Of Exchange Rate Pass-through Research Articles

The role of fiscal discipline on the exchange-rate pass-through during inflation targeting

ABSTRACT The purpose of this paper is to examine the role of fiscal discipline on the dynamics of exchange rate pass-through during inflation targeting. The present study analyses the Turkish economy for the period 2006–2022 by the use of threshold regression models. Our results suggest that fiscal discipline, measured by the IMF-defined primary budget balance as a share of GDP (which excludes the one-off government revenues balance such as privatization, interest earnings, and real estate sales) has a significant role in inflation dynamics. The degree of exchange rate pass-through is significantly lower and thus raises the effectiveness of inflation targeting when the government ensues strict fiscal discipline.

Exchange rate uncertainty and the connectedness of inflation

In this study, we examine the connectedness of exchange rate uncertainty and inflation. In an economy with a flexible exchange rate, price rigidities can lead importers to carry exchange rate risk and they impose a premium for the risk they face by increasing consumer prices. This pricing behavior provides a channel between exchange rate uncertainty and overall price level. We empirically analyze the impact of exchange rate uncertainty on inflation by using panel data from 149 countries over the period 1980–2017. The estimation results point that the uncertainty of the exchange rate has a significant and positive effect on inflation. We also show that effect of exchange rate uncertainty on inflation is nonlinear. As the exchange rate uncertainty increases, the size of its effect on inflation decreases. Moreover, the degree of exchange rate pass-through and the effect of exchange rate uncertainty on inflation differ among country groups and their effects on inflation have decreased through time.

Recent developments in exchange rate pass-through: What have we learned from uncertain times?

This study analyzes the influence of geopolitical uncertainty on the degree of exchange rate pass-through (ERPT) into domestic prices for a sample of advanced and emerging economies. We implement a dynamic panel threshold regression model to capture the possible presence of regime shifts in the exchange transmission. The estimation results suggest significant regime-dependence of the ERPT to geopolitical factors, which is more apparent for the sample of developed countries. Primarily, recent adverse geopolitical events seem to lead to higher rates of pass-through to both import and consumer prices. As the uncertainty surrounding the Ukrainian crisis is likely to continue, it is challenging for policymakers to prevent exchange rate changes from fueling the growing inflationary pressures.

Do export quality and destination income matter for exchange rate pass-through? Evidence from China

This study explores how export quality and destination income affect the degree of exchange rate pass-through (ERPT). While the literature has well documented various determinants of incomplete ERPT, we provide more insights by identifying factors from both supply and demand dimensions. Using Chinese export data over the 2002–2019 period, our empirical results indicate that export prices in home currency increase (decrease) with depreciation (appreciation) of the home currency. Chinese exporters tend to adopt a pricing-to-market (PTM) strategy, resulting in an incomplete ERPT rate of approximately 70%. Export quality and destination income are found to be crucial determinants. The ERPT is asymmetric to exchange rate movements and susceptible to uncertainties. Notably, the exporters subject to high additional duties still have PTM ability during the US–China trade war (2018). For China, these findings help explain the exchange rate disconnect puzzle and highlight the significance of adjusting the exchange rate policy.

Effects of exchange rate pass-through on inflation in Vietnam

The main purpose of this study is to investigate the effect of exchange rate pass-through (ERPT) on domestic price of goods and services in Vietnam under the impact of the interest rate and refinancing rate over the period 2014 to 2019. Unit root test and many Diagnostic tests are conducted before applying the Vector Auto Regressive (VAR) model. Estimation results indicate that exchange rate changes have a positive impact on domestic consumer price level means that an increase in the depreciation of Vietnam dong could cause an increase in domestic price, the degree of ERPT into domestic price level is smaller than interest rate and refinancing one. The study also indicates many problems existing in the actual situation in Vietnam. From those analysis results, the study has proposed monetary policy orientations to help stabilize prices and develop macroeconomics.

Incomplete Exchange Rate Pass-through and International Monetary Policy Cooperation

AbstractThere is no consensus on the existence of welfare gains from international monetary policy cooperation. This study adds to the debate by providing a new open macroeconomics model with incomplete exchange rate pass-through. We find that, from a global perspective, the welfare gains from international monetary policy cooperation arise with incomplete exchange rate pass-through. Furthermore, the country’s incentive for cooperation increases with its degree of exchange rate pass-through. Cooperation benefits small countries with high pass-through; however, it is disadvantageous to large countries with low pass-through. In addition, when there is in the absence of cooperation, fixed exchange rate regime is preferred for a country suffering from monetary uncertainty, particularly for small economies with high exchange rate pass-through.

Does the Incomplete Exchange Rate Pass-through Exist in Sudan?

The purpose of this paper is to examine the nominal exchange rate pass-through to domestic prices in Sudan from 1978–2017. An autoregressive distributed lag (ARDL) approach to cointegration is employed. The analysis is based on impulse response functions (IRFs) and forecast error variance decompositions (FEVDs). The dynamics of the cointegrated system can be investigated via the variance decompositions and IRFs. The findings confirm that the degree of exchange rate pass-through in Sudan is incomplete, and the empirical results also show that the domestic price index is predominantly caused by foreign price in both the short and long runs, in addition to the import price index and the nominal exchange rate; the exchange rate shock has a negative effect on the domestic price. Furthermore, FEVDs analysis illustrates that the variation in domestic price is primarily determined by the import prices, while changes in the exchange rate are primarily determined by the exchange rate itself.

Production sharing and exchange rate pass-through

This paper proposes a theoretical background for various possibilities of exchange pass-through and expenditure-switching by introducing an intermediate input sector into Rodriguez-Lopez (2011) model. I show that the degrees of exchange rate pass-through and expenditure switching depend on the shares of imported inputs in total costs. When the imported input shares are located within some range, a low but positive rate of pass-through to aggregate import prices can be derived in the model. In addition, both the size and the direction of expenditure-switching effects vary according to the imported input shares.

Investigating Exchange Rate Pass-through to Consumer Prices in Nigeria

Abstract Research background: There have been several studies on the degree of exchange rate pass-through (ERPT) to consumer prices, as well as macroeconomic environment with yet no clear direction. Purpose: This research work investigates exchange rate pass-through effects into consumer prices in Nigeria from 1960 to 2018. Research methodology: The methodology employed by the study for estimation is the Johansen cointegration and Vector Error Correction Model (VECM) procedures. Results: The empirical results indicate an incomplete pass-through of exchange rate into consumer prices in Nigeria. The pass-through is found to be 1.6 for the model under consideration. The impulse response function results indicate that the response of the consumer prices to the exchange rate shock decreases immediately to a negative shock in the short run, and continues along the horizon to a positive shock in the long run. Also, the response of consumer prices to interest rate shock decreases immediately and continues to fluctuate to a negative shock in both the short run long run horizon. Novelty: The results support the view that exchange rate policy should be complimented with coordinated macroeconomic policy approaches in order to control inflationary level in the economy. The study therefore recommends that the Federal Government should adopt a tightening of the monetary policy as it will help reduce the impact of exchange rate depreciation on consumer prices.

Exchange rate pass-through: an analysis of a panel quantile regression

The purpose of this study is to examine the degree of exchange rate pass-through (ERPT) with the focus on Taylor (2000)’s hypothesis that asserts ERPT tends to be high (low) in high (low) inflation states. To this end, a panel quantile regression is applied to the data from 37 countries over the period of 1996-2018. The panel quantile regression allows us to capture the distributional heterogeneity in the ERPT coefficient and thus to directly address the question of whether the ERPT degree depends on the inflationary environment. The results indicate that ERPT is low (high) at low (high) quantiles of the inflation rate, supporting Taylor’s hypothesis. Keywords: Exchange rate pass-through, Taylor’s Hypothesis, Panel Quantile RegressionJEL Codes: C13, E31, F31

Exchange rate policy and external vulnerabilities in Sub-Saharan Africa: nominal, real or mixed targeting?

ABSTRACT This paper discusses the theoretical choice of exchange rate regimes in Sub-Saharan African countries that are facing external vulnerabilities. To reduce instability, policymakers choose among promoting external competitiveness using a real anchor, lowering the burden of foreign debt using a nominal anchor or using a policy mix of both anchors. We observe that these countries tend to adopt mixed anchor policies. We solve a state space model to explain the determinants of and the strategy behind this policy. We find that the mixed targeting policy is a two-step strategy: First, monetary authorities choose the degree of nominal exchange rate flexibility according to the velocity of money, trade openness, foreign debt, degree of exchange rate pass-through and exchange rate target zone. Second, authorities seek to stabilize the real exchange rate depending on the degree of competition in the domestic goods market and the degree of foreign exchange intervention. We conclude with regime-switching estimations to provide empirical evidence of how these economic fundamentals influence exchange rate policy in Sub-Saharan Africa.

The Impact of Data Frequency on the Level of Exchange Rate Pass-through to Consumer Prices in Nigeria

This paper investigates the differential impact of data frequency in determining the degree of exchange rate pass-through (ERPT) to consumer prices in Nigeria. The study used annual and quarterly time-series data for 1986- 2013 period. The paper examined the level of long-run ERPT, the speed of adjustments and short-run ERPT using ARDL model. We found high and statistically significant ERPT in the long-run, which is in contrast with the previous studies on Nigeria. The results using quarterly data revealed incomplete ERPT to consumer prices. This paper shows that studies which use higher frequency data are more likely to get incomplete ERPT in the short-run, even in the context of LDCs. In the long-run, incomplete ERPT subsists with the quarterly data while there is a full ERPT for the annual data. The policy implication is that exchange rate stability plays a crucial role in controlling domestic consumer price inflation in Nigeria.

Foreign-currency debt and the exchange rate pass-through

ABSTRACTWe show that higher foreign-currency indebtedness raises the degree of exchange rate pass-through to domestic producer prices. For identification, we use micro-level data from Turkey, an emerging market economy that has experienced large exchange rate movements over the last decade. Matching the Credit Register of Turkey with disaggregated manufacturing sector data on domestic prices and foreign-currency revenues from international trade, we show that sectors with higher ex-ante net foreign-currency liabilities raise their prices significantly more following domestic currency depreciation. The results are stronger if foreign-currency liabilities are short term.

Two-sided heterogeneity and exchange rate pass-through

The bargaining process between exporters and importers is key to understand the degree of exchange rate pass-through. Following the framework established by Goldberg and Tille (2013), we use a Colombian exporter–importer matched data from 2005 to 2014 to identify the relative bargaining power between exporters and importers, and investigate its effect on exchange rate pass-through. The results show that, within each exporter–importer pair, the role of importers is at least as important as exporters, and higher bargaining power of importers are usually associated with higher exchange rate pass-through. Our findings are robust to a variety of bargaining ability measurement, alternative empirical specifications, and the selection of certain industries.

Firm predicted exchange rates and nonlinearities in pricing-to-market

This paper employs the nonlinear autoregressive distributed lag (NARDL) model to investigate possible short- and long-run asymmetry in the pricing-to-market (PTM) behavior of Japanese exporters. In contrast to the conventional threshold specification, this study uses firm predicted exchange rates published by the Bank of Japan, to distinguish between yen appreciation and depreciation periods. Using Japanese export price data at an industry level, we demonstrate that (1) the short-run PTM is almost complete and symmetric in all industries over the entire sample period from 1997 to 2018 and (2) during the latter sub-sample period from 2007 to 2018, Japanese exporters tend to engage in asymmetric PTM behavior in the long run. In the yen appreciation period, most industries choose incomplete but relatively strong long-run PTM. However, in the yen depreciation period, competitive industries tend to conduct complete PTM in the long run, while less-competitive industries tend to raise the degree of exchange rate pass-through (ERPT) in the long run. The results are robust when extended to disaggregated industry level. These empirical findings have important policy implications for the recent unresponsiveness of Japanese real exports to the substantial depreciation of the yen from the end of 2012.

Exchange rate pass-through to import prices: Evidence from Serbia

In this paper we estimated the degree of exchange rate pass-through (ERPT) into aggregate import prices in Serbia. ERPT was determined by application of single equation, cointegration approach (ARDL model), error correction term (ECM) and VAR Granger Causality tests. We based our research on data from 2008Q1 to 2014Q4. The results of our research show partial pass-through in the short run; in the long run pass-through was not observed. In addition to that, we found that appreciation of the nominal effective exchange rate (NEER) led to significant pass-through asymmetry in the short run.

Macroeconomics Determinants of Exchange Rate Pass-Through: New Evidence from the Asia-Pacific Region

ABSTRACT Some recent studies observe an increasing degree of exchange rate pass-through (ERPT) to domestic prices, which has raised questions about the nature of the incompleteness and decline in pass-through. This article reexamines the degree of ERPT to the import, producer, and consumer price indices in Australia, New Zealand, Japan, and Korea in the Asia-Pacific region using up-to-date data, with several important findings. First, we reveal that ERPT to domestic prices follows the distribution chain, in that exchange rate movements alter import prices in the first stage and then producer and consumer prices in the second stage. Second, we offer valid evidence of an increase in ERPT to import prices after the global financial crisis in Japan, Korea, and New Zealand and of a relatively stable ERPT in Australia. Third, the changes in ERPT elasticities are most affected by macroeconomic determinants such as inflation volatility, interest rates, and trade openness, but this varies considerably across the surveyed countries and the three price indices. All our findings make a significant contribution to the empirical literature on ERPT and have policy implications.

Pricing behavior and the role of trade openness in the transmission of monetary shocks

The empirical evidence on the role of trade openness in the monetary transmission is not conclusive: some studies find that it increases the sensitivity of output to monetary shocks, others find that it does not. Using a New Keynesian open economy model, I show that the role of trade openness in the transmission of monetary shocks can be reversed completely by the degree of exchange-rate pass-through into import prices. If the pass-through is complete, traded output increases more than nontraded output after a positive monetary shock, if the pass-through is zero, traded output increases less. Moreover, ignoring sectoral heterogeneity in price rigidity leads to an incorrect assessment of the role of trade openness in the transmission of monetary shocks.

Exchange Rate Pass-through to Domestic Prices in Thailand, 2000-2017

This paper explores the degree of exchange rate pass-through to domestic prices in Thailand using quarterly data from 2000Q1 to 2017Q4. Johansen cointegration tests are employed in the analysis. The degree of exchange rate pass-through is found to be partial and modest. The stable pass-through effect, in the long run, is found for the import price index. The findings give some implications for risk perception by firms and investors regarding the future inflationary environment of the country.

Tariff and exchange rate pass-through for Chinese exports: A firm-level analysis across customs regimes

We examine whether a firm's import content share differentially affects the degree of tariff and exchange rate pass-through into its export prices. Our pricing-to-market model suggests that a firm's import content share negatively affects the degree of exchange rate pass-through but does not affect the degree of tariff pass-through. Using firm-level data for Chinese exporting firms during the period 2000–2006, we find evidence of an almost complete exchange rate pass-through. As expected, when we distinguish firms by their trade regime, processing-trade firms, especially pure-assembly firms which tend to have higher import-content share, have a lower exchange rate pass-through than ordinary trade firms. We find no evidence that the tariff pass-through differs across the various trade regimes.