Exchange Rate Pass-through Effect Research Articles

Exchange rate and inflation dynamics in Kenya: Does the threshold level matter?

This study empirically examined the threshold effect of exchange rate pass-through (ERPT) on inflation in Kenya, while augmenting the exchange rate depreciation in the monetary policy rate using the Taylor rule. The monthly time series data spanning January 2005 to November 2023 was collected for analysis, in which the non-linear threshold autoregressive (TAR) model was employed as the main econometric model. This study's ERPT results reveal that, exchange rate depreciation has positive and significant effect on inflation only when it raises above the monthly threshold level of 0.51 %. In contrast, the Taylor rule analysis results reveal that the exchange rate depreciation has a positive and significant effect the monetary policy rate regardless of the threshold level of 0.67 %. Therefore, keeping domestic currency depreciation below a monthly growth rate of 0.51 % will control the pass-through effect on inflation, and the exchange rate depreciation at any level should always act as a reaction function for the monetary policy rate setting. This study also found that the relationship between exchange rate depreciation and inflation, as well as monetary policy rate is non-linear, which implies a greater pass-through effect when exchange rate depreciation is high. Therefore, we recommend the monetary authority in Kenya to pay attention to the depreciation of the exchange rate depreciation at any level when adjusting the policy rate to tame inflation.

Relationship Between Exchange Rate and Inflation in Afghanistan

Afghanistan is an import dependent country and has been facing perpetual trade balance deficit for decades. In case of imperfect competition in the market or existence of market monopoly, there is a higher chance of reflecting the exchange rate changes on the prices of the goods. In Addition, countries with low level of domestic production and higher amounts of imports usually experience higher degree of the exchange rate pass-through effect on inflation. Countries with high import volumes and low export levels often face a deficit in foreign currency inflows and an excess in outflows. These countries need substantial foreign currency to purchase and import goods from both neighboring and international markets, increasing domestic demand for foreign currencies and consequently leading to domestic currency depreciation. This study investigated the relationship between exchange rates and inflation in Afghanistan, examining how exchange rates impact inflation and the benefits associated with exchange rate mechanisms. The primary research questions include: What is the relationship between exchange rates and inflation in Afghanistan? How does the exchange rate influence inflation in the country? What are the benefits of exchange rate systems? The hypothesis posits that higher inflation typically depresses a country's currency value and that exchange rates directly affect inflation. Additionally, exchange rates determine the value of currency exchanges between different nations. This research aims to elucidate the relationship between exchange rates and inflation in Afghanistan, assess the impact of exchange rates on inflation, and explore the benefits of exchange rate systems. The methodology involves a binary system and utilizes secondary data collected from books, websites, and research papers. Findings indicate that Afghanistan's reliance on imports results in a persistent trade balance deficit, with a significant portion of goods, especially non-food items, being imported due to insufficient domestic production. To import goods, Afghanistan requires foreign currencies, which are typically earned through exports of goods and services as of a result, Afghanistan will experience stability in the exchange rate and in the domestic prices.

The effect of output level, exchange rate and interest rate on inflation in BRIC-T countries

PurposeIn this study, it is analyzed the validity of the exchange rate pass-through (ERPT) effect and the effect of interest rate and output level on the inflation rate (IR) in Brazil, Russia, India, China and Turkey (BRIC-T) between the years 1995Q1 and 2022Q4.Design/methodology/approachThe methods such as the panel unit root test developed by Westerlund (2012), the LM bootstrap panel cointegration test developed by Westerlund and Edgerton (2007), the common correlated effects (CCE) estimator developed by Pesaran (2006) and the augmented mean group (AMG) estimator developed by Eberhardt and Bond (2009) that take into account the cross-section dependency are applied for analysis.FindingsAs a result of the findings, it is determined that the ERPT effect is valid in Turkey, Brazil, Russia, India and China and the cost channel is valid only in China. Finally, it is found out that output level positively affects inflation in Turkey, Brazil, Russia, India and China.Practical implicationsAll these results indicate that the economies of Turkey, Russia, Brazil and India have a fragile structure, especially in terms of inflation. Therefore, the central bank of these countries should maintain exchange-rate stability to implement the inflation-targeting strategy successfully. In this context, central bank independence should be increased in these countries in achieving this objective. Also the results indicate that it is still early to consider whether BRIC-T countries and accordingly the Belt and Road Initiative will be an alternative against the domination of the USA and European Union (EU) on international trade system or it will substitute them.Originality/valueIn this study, it is tested that the impact of interest-rate (NIR), exchange-rate (FER) and output level (IPI) on general level of prices. Besides, it is analyzed that whether production level affects the IR. Also, the study investigates the economic issues such as ERPT effect and cost channel. The study analyzes whether China's Belt and Road Initiative is successful or not. In this study, we used the panel data methods that allow for structural breaks and cross-section dependency. For these reasons, this study differs from other studies in the literature both in terms of scope and methods used.

The effect of exchange rate pass-through to inflation in Nigeria

The study examines the effect of exchange rate pass-through (ERPT) to inflation in Nigeria. The study period spans from 1990 to 2022 and data were sourced from Central Bank of Nigeria Statistical Bulletin and World Bank’s Development indicators (WDI). The study employed preliminary test of Augmented Dickey Fuller unit root test. Analytical technique of Autoregressive Distributed Lag (ARDL) model was used for the analysis. The dependent variable is Consumer price index proxied by inflation while the explanatory variables include monetary policy rate (MPR), nominal effective exchange rate (NEER), import price index (IMPI) and Global oil price (GOP). The result of unit root suggests mixed order of integration while the ARDL bound test demonstrate long run relationship among the variables under consideration. Findings indicate that exchange rate exhibit a positive and significant impact on consumer price while import price exerts a negative and significant influence on consumer price. Based on this outcome, the study suggests that monetary authority should exercise caution in using devaluation of the domestic currency to promote economic growth, as that would not only aggravate domestic inflation but also likely increase the ERPT. Given that exchange rate devaluation is unlikely to improve the country’s chances in the international market vis-à-vis its exports.

Exchange Rate Pass-Through and Inflation: Policy Insights for Vietnam Based on Comparative Analyses Across Asia

The exchange rate is a crucial macro indicator for any open economy, whereby any change in the rate would influence, to a certain extent, various socioeconomic facets. One of the significant impacts is revealed in the pass-through of exchange rate variations to price inflation, also known as the exchange rate pass-through (ERPT). This paper explores the effect of ERPT on domestic inflation in Vietnam by comparing with other Asian economies. Specifically, pass-through mechanisms are examined for every single price as well as a distribution chain from import price index (IMP), producer price index (PPI) to consumer price index (CPI). The empirical results show that exchange rate shocks positively influence the price changes in Vietnam as well as in other Asian countries. According to Cholesky decomposition, the exchange rate plays a limited role in regulating CPI movements. Besides, world commodity prices are found to have a significant impact on domestic inflation across the sample-countries. Our findings reveal profound implications for monetary policy management and price stability.

The oil price-inflation nexus: The exchange rate pass- through effect

Crude oil prices have been considered one of the key drivers of inflation worldwide, reaching a peak in 2022. Inflation targeting plays a pivotal role in such a high inflation episode. In this vein, the exchange rate is a key channel in transmitting the high commodity price into the domestic price level, known as the exchange rate pass-through effect. On this basis, this paper scrutinizes the connection between oil prices and inflation through RMB exchange rates. We verify that the covariance between exchange rates and oil prices are sound factors in explaining and predicting inflation in China. We advocate that policymakers can use the exchange rate as an inflation stabilizer by reducing the covariance between the exchange rate and oil price, especially for emerging economies and during the turmoil periods. This could be extremely helpful to frustrate the exchange rate pass-through effect of high commodity prices globally, which sheds new insights into stabilizing inflation and assisting inflation targeting for emerging economies.

Effect of exchange rate on inflation in the inflation targeting framework: Is the threshold level relevant?

The continuous depreciation of the exchange rate in Ghana has raised concern about its effect on inflation and the economy at large. This paper examines the threshold effect of exchange rate pass-through (ERPT) on inflation using a monthly data from January 2002 to December 2018. The relevance of the exchange rate threshold in the Taylor rule has also been examined. Using the threshold autoregressive (TAR) method, the results of the ERPT model revealed that exchange rate depreciation beyond a monthly threshold of 0.70% has a significant positive pass-through effect on inflation, which gives credence to the relevance of threshold level. The results of the monetary policy rule model also showed that regardless of the threshold level of 0.51%, the exchange rate significantly influences the monetary policy rate positively. Therefore, paying proper attention to the exchange rate in the policy rule despite the threshold (0.51%) will prevent the exchange rate depreciation from exceeding the optimal level (0.70%) and hence no ERPT on inflation. Based on these findings, it is suggested that monetary regulators should view the exchange rate at any level essential to adjust the policy rate.

Exchange Rate Pass-Through Effect on the Price of Imported Medical Goods in Iran: A Nonlinear Autoregressive Distributed Lag (NARDL) Approach

Exchange Rate Pass-Through Effect on the Price of Imported Medical Goods in Iran: A Nonlinear Autoregressive Distributed Lag (NARDL) Approach

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.

Analysis of Macroeconomic Variables Affecting Inflation and Exchange Rates

This study aims to examine the movement of macroeconomic variables, especially inflation and exchange rates. Inflation affects the exchange rate through the Law of One Price and Purchasing Power Parity, while the exchange rate affects inflation through the Exchange Rate Pass-Through Effect. This study also aims to examine the effect of other macroeconomic factors on inflation and exchange rates. The variables studied and suspected of influencing inflation are interest rates, money supply, exports, imports, government spending, unemployment, and exchange rates. While the variables studied and suspected of influencing the exchange rate are the difference in interest rates between domestic and foreign interest rates, trade balance, public debt, inflation and exchange rates MYR/USD, THB/USD, PHP/USD, SGD/USD. The research period is from 2004-2017. The research method used is the Two-Staged Least Square model. The results found that there was no simultaneity between inflation and the exchange rate after adding the control variable. Significant factors that partially affect inflation are exports, imports, government spending, unemployment, and the rupiah exchange rate. Meanwhile, interest rates and money supply partially have no significant effect. In terms of the IDR exchange rate, significant factors that partially affect IDR are the difference in interest rates between Indonesia and the US, government debt, trade balance, MYR, THB, and SGD. Meanwhile, PHP and inflation have no significant effect on the IDR.

Exchange Rate Volatility, Inflation and Economic Growth in Developing Countries: Panel Data Approach for SADC

In the Southern African Development Community, the relationships between exchange rate instability, inflation and economic growth remain at the forefront of economic debate because of the historical antecedent and economic clustering of member countries. Nonetheless, much is not known regarding the complexity, complementarity or substitutability of exchange rate instability and inflation on economic growth for SADC countries. This article examined the influence of exchange rate instability on the inflation–growth nexus of the region for the period of 2000 to 2018. Three major techniques of analyses, Pooled Mean Group (PMG), Generalised Moments (GM) and Dynamic Fixed Effect (DFE), were employed in achieving the goal of the study, but the Pooled Mean Group estimator of the Panel Autoregressive Distributed Lag was favoured by the Hausman test as the main instrument. The GARCH (1, 1) was also employed to generate exchange rate instability. The findings of the study showed that exchange rate instability and inflation have a negative relationship with economic growth of the region. Results further show evidence that economic growth of the region is adversely influenced by the consequential effect of exchange rate instability on inflation: the higher the level of instability in exchange rate, the worse the inflationary-growth relationship of the region. This confirms the menu cost theory of price setting: the higher the rate of inflation, the quicker the exchange rate pass-through effect. It is therefore recommended that policies to ensure appreciation of local currencies should be the priority of member nations.

Exchange rate pass-through and its heterogeneity under the pegged regime: a case of Vietnam

This paper analyses the exchange rate pass-through effects (ERPT) into consumer prices in Vietnam with a pegged regime during 2001–2019 using a structural vector autoregressive approach. The model is identified based on the fit of data rather than a priori theorizing. Firstly, we find that the degree of ERPT in the country is higher than that in other emerging and developed economies. High and volatile inflation, a high degree of openness, and exchange rate regime are essential factors that explain the difference. Besides, we show that ERPT is positively correlated with the level and the volatility of inflation across sectors. Since the results are derived from a single country, the heterogeneity is more likely to be attributable to industry-specific rather than macro factors.

Эффект переноса валютного курса в потребительские цены в регионах России: поиск пространственных взаимосвязей

Introduction. The article examines the spatial heterogeneity and factors of the exchange rate pass-through effect in consumer prices in Russian regions. Two hypotheses are tested. The first hypothesis is that there are differences in the magnitude of the passthrough between the Russian regions, the second is the significant influence of spatial relationships between regions on the magnitude of the pass-through effect. Theoretical analysis. The factors of the interregional differences in the pass-through effect are analyzed: the share of imports in the consumption structure, the share of value added produced in the domestic market in the final price of goods, transaction costs, the level of competition and the market structure. Empirical analysis. First pass-through estimates were obtained by means of vector autoregression model. Then the spatial dependence of the exchange rate pass-through was investigated on the basis of the global Moran and Geary indices, LISA, SAR and SEM models. Results. The results indicate the heterogeneity of the pass-through effect in Russian regions, which confirms the first of the hypotheses put forward. Confirmation of the second hypothesis was found only for food products in the short term, which is due to the nature of commodity flows between Russian regions. It is concluded that it is necessary to study the spatial relationships of the pass-through effect based on disaggregated prices.

Asymmetric Exchange Rate Pass-Through into Inflation in Turkey: A NARDL Approach

Inflation expectation resulting from the exchange rate increases is one of the widely discussed topics in the literature. The extent of the effect of exchange rate pass-through on inflation, and the duration of the impact are essential data that should be considered in determining disinflation policies. The literature findings show that the high level of rises in the exchange rate pass-through much faster on inflation, especially in dollarized economies with high inflation inertia. On the other hand, it has been revealed that the relationship between exchange rate inflation is asymmetrical. The Turkish economy, which struggles with chronicle higher inflation, has experienced a currency crisis in 2018. Therefore, to analyse the effect of exchange rate on inflation in Turkey is very important for the effectiveness of the fight against inflation and developing a policy proposal in this direction. This study examined the asymmetric relationships between exchange rate and inflation using a nonlinear autoregressive distributed lag model for 2004:Q1 – 2019:Q4. Findings indicate that the exchange rate pass-through into inflation is asymmetric in Turkey in the long-run. Besides, a decrease in the exchange rate has no statistically significant effect on inflation, but an increase also increases inflation in the short-run.

The transparency of monetary policy and the effect of exchange rate pass-through

The work is devoted to the study of the influence of changes in the transparencyof monetary policy on the effect of exchange rate pass-through in consumer prices. Based on econometric modeling of cross-country panel data, it is shown that an increase in the transparency of communication between the central bank and the population leads to a decrease in the elasticity of domestic prices with respect to the exchange rate in countries that target inflation and adhere to other monetary policy regimes. The effect is observed for both developed and developing economies; it is stronger in the second case. The obtained result can be interpreted as an argument in favor of the advisability of the Bank of Russia transition from a verbal description of its future actions to the publication of a quantitative forecast of the interest rate trajectory.

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 to Prices in Mexico: A Study of the Main Border and Non-Border Cities

This study analyzes the exchange rate pass-through effect on the Consumer Price Index (CPI) in Mexico's main border and 27 non-border metropolitan cities. The period examined includes monthly data from January 2002 to December 2019. A vector autoregressive model (VAR) is used, which includes formal employment at the city level as a proxy to economic development, interest rates, nominal exchange rates, each analyzed city’s CPI, U.S. consumer prices, energy commodity prices and control variables such as service sector employment share and large firm employment share. Impulse response functions are constructed. Results for the 2002-2016 period indicate that exchange rate changes primarily affect border cities. Different arguments are included to justify such results. Pass-through values are also found to increase in general for all cities when the period 2017-2019 (January 2017 when important gasoline price shocks started previous its price liberalization in December 2017) is included in the regressions.

Analiza uticaja promene nominalnog deviznog kursa na stopu inflacije na primeru odabranih zemalja

Inflation rate is one of the essential macroeconomics variables and it represents the main goal of monetary policy. It is determined by a great number of factors, so it is necessary to analyse the impact their changes have on inflation rate. The purpose of this research is the analysis of the nominal exchange rate pass-through effect on inflation rate in selected emerging and developed countries in the period 2014-2020, which share the same characteristics of inflation targeting, as main monetary policy regime, and managed floating exchange rate, as exchange rate type. Inverse proportion between volatility of nominal exchange rate and inflation rate is proven (depreciation of nominal exchange rate of national currency leads towards the growth of inflation rate), as well as higher pass-through effect in emerging countries compared to developed countries.

VIETNAM’s INCOMPLETE EXCHANGE RATE PASS-THROUGH

We measure exchange rate pass-through (ERPT) for Vietnam and find that Vietnam’s ERPT is low, incomplete, and time varying. Our results also indicate that during appreciation periods ERPT is modest, but that during downturns ERPT effects are much larger. Moreover, our results indicate that the flexible exchange rate regime has successfully anchored the ERPT.

Examining the asymmetric monetary policy response to foreign exchange market conditions in emerging and developing economies

In many emerging market economies that have adopted inflation targeting, policymakers are concerned with the effects that strong appreciation/depreciation pressures and excessive volatility in exchange rates may have on economic stability and their ability to reach their inflation targets. The research in this paper addresses whether central banks have an asymmetric response to exchange rate conditions with respect to meeting their monetary policy objectives. Using a panel of 30 emerging market and developing economies, we employ a panel threshold regression analysis to determine whether policymakers respond differently during appreciation versus depreciation periods, during periods of high versus low exchange rate volatility, or when the country has a relatively high exchange rate pass-through effect. We find that policymakers react more strongly and significantly to depreciations with increases in domestic interest rates, while remaining inactive during periods of appreciation. Yet, during appreciationary periods, they react more strongly to deviations in output from its potential, suggesting a concern over competitiveness. Furthermore, volatility in exchange rates is a significant concern to policymakers, as they regularly claim, and when volatility is sufficiently high, policymakers react with higher interest rates to maintain stability and mitigate capital outflows. Lastly, with a stronger exchange rate pass-through effect, policymakers are more responsive to depreciationary pressure as it affects their ability to reach inflation targets.