Exchange Rate Pass-through Research Articles

Divergent Relationships between Exchange Rate Pass-through and Policy Rates Across Economies: An Extension of the Taylor Rule

Although central banks often prioritize exchange rate stability, its role is frequently overlooked in the monetary policy analysis and simple interest rate rules do not comprise exchange rate arguments even in small open economies. This study extends the traditional Taylor rule by incorporating exchange rate deviations to determine their influence on monetary policy conduct across various economies. Our findings reveal heterogeneous impacts of exchange rate deviations on policy rates. Specifically, exchange rates significantly influence monetary policy in economies with fixed exchange rate regimes, higher foreign reserve ratios and lower levels of financial development.

An Analysis of Exchange Rate Pass-Through in the Industries of Paper and Paper Products in Korea

An Analysis of Exchange Rate Pass-Through in the Industries of Paper and Paper Products in Korea

Exchange Rate Pass-Through on Prices in Nigeria—A Threshold Analysis

Persistent exchange rate depreciation and its debilitating effects on rising inflation have remained a concern in Nigeria. This article explores the effects of exchange rate pass-through on producer prices, consumer prices, export prices, import prices and the Taylor rule from 2000 to 2023, using quarterly data and adopting threshold autoregression and self-exciting smooth threshold regression methods. The findings suggest that there are non-linearities in the way that exchange rate depreciation affects prices in Nigeria. Furthermore, the findings suggest a threshold of 5 percent depreciation. Two sub-sample analyses corroborate the main findings, showing that a threshold of 5 percent is the optimum benchmark if demand and supply are not to be weakened. At this level or below, the effects of exchange rate depreciation on inflation are much lower, even though prices will rise. However, above this benchmark, the effects of depreciation on inflation are much larger, weakening consumer demand for both imported and domestic goods as well as producer supply of both exported and domestic goods and services in the economy. This result implies that an average exchange rate depreciation not higher than 5 percent within a quarter is reasonable if the Nigerian economy is to remain competitive both domestically and globally. Finally, the results suggest that the exchange rate pass-through to prices is considerably higher in Nigeria below the threshold, while it overshoots for producer prices, export prices, and import prices above the threshold. To keep inflation in check, this paper suggests that the monetary authorities should try to keep exchange rate depreciation below the established thresholds, while also considering adjusting the policy rate to take into account the exchange rate depreciation thresholds in order to keep domestic prices stable.

Exchange Rate Pass-Through into Import Prices: Evidence from Türkiye during 2010-2020 Period

This article analyses pass through of exchange rates into the import prices for an emerging economy, Türkiye, which faced severe fluctuations in the nominal exchange rate in the recent years, and experienced significant increases in domestic prices. The Turkish economy continues to struggle due to high inflationary pressures and a steep Turkish Lira (TL) devaluation particularly after 2017. This study aimed at examining the relationship between exchange rate and import prices using quarterly data for the period of 2010q1-2019q1, while the empirical methodology is framed in the multivariate cointegration analysis, along with the application of the Johansen cointegration test and the development of an autoregressive error correction vector for the determination of the pass-through in the long term. Our findings show that 85.6% of the fluctuations of the nominal exchange rate are transmitted to the import prices in the mentioned period, slower than the findings of the study by Akgunduz and his colleagues as the difference of import prices from its long-run relationship implied by the real exchange rate is likely dominated by energy prices in a strong manner. Second significant finding derives from the parameter that measures the speed of the pass-through, whose estimate has been found as -0.0125, inferring that the adjustment in short-term imbalances between import prices and the nominal exchange rate through changes in import prices is rather slow.

Heterogeneity in exchange rate pass-through to import prices in Thailand: Evidence from micro data

We use transaction-level customs data and show that there is significant the Thai border. Our findings uncover several structural determinants of ERPT, where we document lower ERPT for (i) prices of differentiated goods, (ii) firms with a higher degree of market power, (iii) prices of goods controlled by the government and (iv) goods invoiced in the local currency. We also find that for the large majority of Thai imports that are invoiced in the US dollar under the dominant currency pricing (DCP) paradigm, price responses to the US dollar are much stronger than those associated with the bilateral exchange rate vis-à-vis the exporters' currency, but only in the short run. Finally, by investigating state-dependent properties of ERPT, we find that small exchange rate changes are associated with higher ERPT, while the degree of pass-through is stronger during episodes of depreciations rather than appreciations, particularly for goods that practice DCP.

Asymmetry and non-linearity in exchange rate pass-through: Evidence from scanner data

Using retail scanner data from Kazakhstan, an emerging economy with significant and unexpected exchange rate fluctuations, we observe an incomplete yet substantial exchange rate pass-through (ERPT) into prices. Specifically, we note a 50% change occurring a year after the initial shock. The ERPT demonstrates asymmetry in response to exchange rate movements. Notably, the direction of this asymmetry is opposite for imported versus domestic products. Furthermore, our findings indicate that ERPT is non-linear; the price response is more pronounced when the exchange shock is small, aligning with the existence of menu costs. Understanding these asymmetric and non-linear price responses to exchange rate shocks may be crucial for formulating effective inflation targeting policies, especially in emerging economies prone to high inflation.

Exchange Rate Pass-Through to Provincial Consumer Prices: A Geographical-Goods Level Analysis

This study investigates exchange rate pass-through (ERPT) to provincial consumer prices in Canada from a geographical and goods-specific perspective. ERPT refers to the extent in which changes in the exchange rate influence domestic price movements. For example, a depreciation of the Canadian dollar relative to the U.S. dollar may increase the price of imports into Canada from the U.S., thereby raising consumer prices in Canada. Using extensive datasets from 2000 to 2023, this research quantifies the magnitude and speed of ERPT across various provinces and consumer price index (CPI) categories. The methodology employs a regression model framework, building upon the approach of Savoie-Chabot and Khan (2015) to estimate the impact of short-run and long-run exchange rate fluctuations on consumer prices. The findings highlight significant regional and categorical variation in ERPT. For example, Alberta exhibits the highest short-run ERPT for energy consumer prices where a 1% increase in the exchange rate leads to a 0.60% increase in prices. In contrast, Quebec exhibits the lowest short-run ERPT for energy consumer prices where a 1% increase in the exchange rate leads to only a 0.18% increase in prices. Price responses in each of these provinces differs from the short-run ERPT of Canada which is 0.32%. Furthermore, energy prices exhibit the highest sensitivity to exchange rate fluctuations, while most often categories excluding energy show minimal impact. These results emphasize the importance of region-specific economic policies to address distinct provincial price responses to exchange rate fluctuations. This study offers valuable insights for policymakers to develop strategies that mitigate any adverse economic effects of exchange rate changes and promote regional economic stability and growth.

Estimation of Exchange rate pass-through in Iran’s multiple exchange rate system

Estimation of Exchange rate pass-through in Iran’s multiple exchange rate system

Time-varying exchange rate pass-through over 2005–2021 using dynamic model averaging

This study reexamines the time-varying structure of exchange rate pass-through (ERPT) by employing the dynamic model averaging (DMA) method. DMA is a novel empirical methodology that allows both parameters and predictors of the model to change over time, thereby addressing model uncertainty in determining time-varying ERPT degrees. We apply DMA to quarterly time series data spanning from 1996:1–2021:3 for each of the 39 advanced and emerging economies in the sample. The findings reveal a shift in short run ERPT dynamics prompted by the global crisis in 2008-09. While ERPT levels are initially low, they have been rising steadily since the onset of the pandemic across all advanced countries. Conversely, the ERPT levels are approximately twice as high in emerging economies, exhibiting a U-shaped pattern over the sample period.

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.

Exchange Rate Pass-Through to Inflation in Singapore

Exchange Rate Pass-Through to Inflation in Singapore

Inflation-balance of trade nexus in Nigeria: The impact of exchange rate pass-through

The relationship between exchange rate (EXR) and foreign trade (FT) in Nigeria has been a contentious issue since Nigeria’s independence in 1960. This study investigated the link between exchange rate and foreign trade through the prism of exchange rate pass-through (EXRPT) to domestic prices, utilizing monthly data from 2011 to 2022. The study was built on two models—the base and main models respectively. Employing the VAR technique and its Vector Error Correction Model (VECM) extension, the paper found that EXRPT to consumer prices is incomplete in the short run but its effect was found to be higher on imports than on consumer prices. It follows that the impact of EXRPT diminishes along the price chain. Results from the main model indicate that the impact of domestic prices on balance of trade was found to be negative with elasticity of −0.437541and is also statistically significant, thus, confirming the Marshal-Lenner condition. The Marshal-Lenner condition and findings of this study provide evidence that depreciating exchange rate is not recommended for an import inelastic country like Nigeria.

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.

Exchange Rate Pass-Through to Domestic Prices: Is Inflation Targeting an Optimal Policy Choice for Pakistan?

This study investigates the effect of exchange rate dynamics and its impact on consumer prices in Pakistan. Using monthly data for the period 2004- 2022, the Recursive Vector Autoregressive (VAR) technique has been employed for the empirical analysis. The recursive VAR estimation technique yields impulse response functions that demonstrate the incompleteness of exchange rate pass-through (ERPT). The results of the VAR reflect that the consumer prices bring most of the error variance in itself for the period under consideration. The exchange rate has been established to be the second most significant source of variations in consumer prices. The empirical results suggest that the lower ERPT reduces the risk of exchange rate volatility. Hence the monetary authorities may take steps to adopt inflation targeting in Pakistan.

Inflation-balance of trade nexus in Nigeria: The impact of exchange rate pass-through

The relationship between exchange rate (EXR) and foreign trade (FT) in Nigeria has been a contentious issue since Nigeria’s independence in 1960. This study investigated the link between exchange rate and foreign trade through the prism of exchange rate pass-through (EXRPT) to domestic prices, utilizing monthly data from 2011 to 2022. The study was built on two models—the base and main models, respectively. Employing the VAR technique and its Vector Error Correction Model (VECM) extension, the paper found that EXRPT to consumer prices is incomplete in the short run, but its effect was found to be higher on imports than on consumer prices. It follows that the impact of EXRPT diminishes along the price chain. Results from the main model indicate that the impact of domestic prices on balance of trade was found to be negative with an elasticity of −0.437541 and is also statistically significant, thus confirming the Marshal-Lenner condition. The Marshal-Lenner condition and findings of this study provide evidence that depreciating exchange rate is not recommended for an import-inelastic country like Nigeria.

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.

Testing the non-linearities of exchange rate pass-through in Somalia: does dollarization affect consumer prices?

Testing the non-linearities of exchange rate pass-through in Somalia: does dollarization affect consumer prices?

Trade invoicing currencies and exchange rate pass-through: The introduction of the euro as a natural experiment

A recent literature emphasizes the prominence of dominant currencies in international trade invoicing and the role of invoice currencies in the transmission of exchange rate shocks. In this paper, we examine the introduction of the euro as a once-in-a-century natural experiment that induced a substantial shifting in invoice currencies, allowing us to test existing theories. We use unique data on the invoice currencies of the universe of export and import transactions of Chilean firms trading with the Eurozone over the period 1997–2010. Before the euro, exports to the Eurozone were dominated by the US dollar, and euro legacy currencies were rarely used. The introduction of the euro led a substantial number of firms to switch their invoice currencies to euros, which eventually accounted for 40% of all transactions. We first study the determinants of the adoption of the euro in exports to the Eurozone, finding a key role for strategic complementarities and for the invoice currency of imported inputs. We then show how firms switching from dollars to euros faced a radical transformation of their exchange rate pass-through, in line with recent theories. While the literature has studied trade invoice currencies in settings in which these are very persistent firm-level choices, our findings validate the conjecture that large–scale policy changes can lead to changes in these choices, and simultaneous changes in exchange rate pass-through.

Distributional Influence of Exchange Rate Pass-Through on Inflation in Nigeria: Evidence from Quantile Regression Model

Distributional Influence of Exchange Rate Pass-Through on Inflation in Nigeria: Evidence from Quantile Regression Model