Incomplete Exchange Rate Pass-through Research Articles

Exchange Rate Pass-Through to Domestic Inflation in Ghana

The current study estimates the exchange rate pass-through on domestic prices from January 2013 to December 2018, using a recursive vector autoregressive model (VAR). Applying Cholesky decomposition to the model, six variables were ordered as follows: oil prices, output gap, exchange rate, import prices, overall inflation and Treasury bill rate with an assumption that the identified shocks contemporaneously impact variables which are ordered after the shock without any contemporaneous feedback. We find evidence of incomplete exchange rate pass-through to domestic prices. Thus, domestic price changes by 9.6 percent in the first three months following an exchange rate shock and the shock dies out after a year with a total pass-through effect of 10.7 percent. We also find that, exchange rate effect is more pronounced for the imported prices than the overall inflation, suggesting some moderation of pass-through effect in domestic price dynamics.

Monetary policy in practice: do central banks respond to movements in exchange rate and credit growth?

PurposeThis study examines the importance of exchange rate and credit growth fluctuations when designing monetary policy in Thailand. To this end, the authors construct a small open economy New Keynesian dynamic stochastic general equilibrium (DSGE) model. The model encompasses several essential characteristics, including incomplete financial markets, incomplete exchange rate pass-through, deviations from the law of one price and a banking sector. The authors consider generalized Taylor rules, in which policymakers adjust policy rates in response to output, inflation, credit growth and exchange rate fluctuations. The marginal likelihoods are then employed to investigate whether the central bank responds to fluctuations in the exchange rate and credit growth.Design/methodology/approach This study constructs a small open economy DSGE model and then estimates the model using Bayesian methods.Findings The authors demonstrate that the monetary authority does target exchange rates, whereas there is no evidence in favor of incorporating credit growth into the policy rules. These findings survive various robustness checks. Furthermore, the authors demonstrate that domestic shocks contribute significantly to domestic business cycles. Although the terms of trade shock plays a minor role in business cycles, it explains the most significant proportion of exchange rate fluctuations, followed by the country risk premium shock.Originality/value This study is the first attempt at exploring the relevance of exchange rate and credit growth fluctuations when designing monetary policy in Thailand.

Exchange Rate Pass-Through to Brazilian E-Commerce Prices

E-commerce has experienced significant growth and is becoming more relevant to economies. The exchange rate can have notable implications on e-commerce prices, and this relationship is of great interest to consumers and retailers transacting online. Brazil is prominent among other emerging countries in issues relating to e-commerce. This article analyzes the relationships between the exchange rate and e-commerce prices in Brazil. The results reveal that: (a) there is an incomplete exchange rate pass-through to Brazilian e-commerce prices; (b) there is temporal precedence of the exchange rate in relation to these prices; (c) there is the possibility of arbitraging online purchases based on exchange rate variations. This article contributes to understanding the e-commerce price behavior in an emerging country. The evidence can support buyers interested in arbitrage. JEL Classification F31, F41, L81

Simple Rules of the Monetary Policy and Incomplete Exchange Rate Pass-Through

Simple Rules of the Monetary Policy and Incomplete Exchange Rate Pass-Through

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.

Time-Varying Exchange Rate Pass-through in Eastern Europe

Using quarterly data for the 1998-2021 period, and with the application of Kalman filter estimates it is shown that the incomplete exchange rate pass-through (ERPT) is somewhat stronger for countries with a floating exchange rate regime, especially for producer prices. Since the middle of 2000s, the ERPT to consumer and producer prices for 11 Central and Eastern European (CEE) countries, as well as for the Baltic States, seems to be stable in most of the countries. With the exception of the Czech Republic, Romania, Estonia and Latvia, there is a tendency for strengthening of the ERPT to producer prices in the wake of the world financial crisis of 2008-2009.

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.

A Medium-Scale Bayesian DSGE Model for Kazakhstan with Incomplete Exchange Rate Pass-Through

This paper analyzes the sources of business cycle fluctuations in Kazakhstan and the relevance of various frictions in the economy using a medium-scale DSGE model with imperfect exchange rate pass-through. We estimate the model via Bayesian methods and present estimates of structural parameters of the model and highlight the role of various shocks in explaining the actual dynamics of observed variables. In the absence of quality and deseasonalized data, we show that the DSGE model with time-varying markups possesses a reasonable level of accuracy as the one-sided Kalman filter predictions match the dynamics of the observable variables. Posterior estimates of the model show that the long-run growth rate of output is 4.5% per annum and the exchange rate pass-through to domestic prices is between 21% and 35% within a quarter. We also find that risk premium shocks have played an important role in determining the inflation rate, the interest rate and the real exchange rate in the economy since 2015.

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.

Do Prices Rise Faster Than They Fall? Evidence From Scanner Data

It is a stylized fact that product prices tend to react faster to an increase in costs of intermediate inputs, than to a decrease. This study uses scanner data of retailers in an emerging economy, Kazakhstan, to analyze how large exchange rate shocks impact consumer prices. Consistent with previous studies, we found an incomplete exchange rate pass-through (ERPT) into consumer prices, even a year after the initial shock. This ERPT, however, is heterogeneous and depends on product type (imported versus domestic), shock size, and retailer size. In particular, ERPT is higher for imported products (50%) than for domestic products (25%); ERPT is also non-linear and higher for large retailers. Distinguishing the impacts of appreciation and depreciation reveals that ERPT is asymmetric and the direction of asymmetry is opposite for imported and domestic products. Our findings suggest that domestic producers may be keen on preserving the market share while foreign manufacturers may be more concerned with increasing markup.

The Vietnamese business cycle in an estimated small open economy New Keynesian DSGE model

PurposeThe primary purpose of this paper is to investigate the sources of the business cycle fluctuations in Vietnam. To this end, the author develops a small open economy New Keynesian dynamic stochastic general equilibrium (SOE-NK-DSGE) model. Accordingly, this model includes various features, such as habit consumption, staggered price, price indexation, incomplete exchange-rate pass-through (ERPT), the failures of the law of one price (LOOP) and the uncovered interest rate parity. It is then estimated by using the Bayesian technique and Vietnamese data 1999Q1–2017Q1. Based on the estimated model, this paper analyzes the sources of the business cycle fluctuations in this emerging economy. Indeed, this research paper is the first attempt at developing and estimating the SOE-NK-DSGE model with the Bayesian technique for Vietnam.Design/methodology/approachA SOE-NK-DSGE model—Bayesian estimation.FindingsThis paper analyzes the sources of the business cycle fluctuations in Vietnam.Originality/valueThis research paper is the first attempt at developing and estimating the SOE-NK-DSGE model with the Bayesian technique for Vietnam.

Statement of Retraction: Incomplete Exchange Rate Pass-Through: Evidence from Exchange Rate Reform in China

This article refers to:RETRACTED ARTICLE: Incomplete Exchange Rate Pass-Through: Evidence from Exchange Rate Reform in China

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.

Exchange rate pass-through into inflation in Vietnam: evidence from VAR model

PurposeThe purpose of this paper is to examine and analyze the exchange rate pass-through into inflation (ERPT) in Vietnam.Design/methodology/approachThe paper examines and analyzes the ERPT in Vietnam by applying vector autoregression model over the period 2008‒2018.FindingsThe key finding of the research is that from the impulse response results, the transmission of exchange rate shocks to inflation is significant in Vietnam, and this is incomplete exchange rate pass-through. Moreover, the evidence from variance decompositions argues that exchange rate is an important factor to explain the fluctuation of inflation.Originality/valueIn overall, the depreciation or appreciation of exchange rate in Vietnam will considerably impact inflation.

Deep habits and exchange rate pass-through

Habit persistence at the level of individual goods varieties can explain incomplete exchange rate pass-through to international prices. Deep habits give rise to a dynamic import demand function that leads to import price markup adjustments, independently of nominal pricing frictions. Augmenting a two-country DSGE model with deep habits, we obtain low exchange rate pass-through to import prices even when nominal local currency price rigidities are negligibly low. As nominal pricing frictions become more important, the presence of deep habits further impedes the pass-through of exchange rate fluctuations. Estimating model variants with limited information as well as full information methods, we find that the deep habits model requires much lower degrees of nominal price rigidities to match empirical measures of the pass-through of exchange rate fluctuations to US import prices.

Exchange Rate Pass-Through, Nominal Wage Rigidities, and Monetary Policy in a Small Open Economy

This paper discusses the design of monetary policy in a New Keynesian small open economy framework by introducing nominal wage rigidities and incomplete exchange rate pass-through on import prices. Three main findings are summarized. First, with the existence of an incomplete exchange rate pass-through and nominal wage rigidities, the optimal policy is to seek to minimize the output gap, the variance of domestic price and wage inflation, as well as deviations from the law of one price. Second, the CPI inflation targeting Taylor rule is welfare enhancing when there is a technological shock to the economy. The exception occurs when there is a foreign income shock, which minimizes welfare losses under the domestic inflation targeting Taylor rule. Last, two stylized Taylor rules turn out to be a bad approximation, but the modified Taylor rules that respond to the unemployment gap rather than the output gap are a closer approximation to the optimal policy.

Exchange Rate Pass-Through in ASEAN Countries: An Application of the SVAR Model

ABSTRACT Central banks in emerging countries generally question the effect of exchange rate pass-through into price levels in the national economy in order to implement monetary policy effectively. This article is conducted in response to these macroeconomic concerns. Five founding members of the Association of Southeast Asian Nations (ASEAN), for which all the required data are available, are included in our sample with up-to-date time-series data until 2016. We use a structural vector autoregressive model in this study. Several interesting findings emerged from our study. First, we find incomplete exchange rate pass-through to domestic prices, and the producer price index is found to be affected more than the consumer price index. Second, the exchange rate shocks are found to have an immediate effect within one quarter on producer prices in all the countries. Third, variance in domestic prices is found to be caused mainly by shocks from oil prices, output gaps, and exchange rates, with some differences in the extent of effects across countries. Fourth, in these five countries, interest rates appear to play a minor role in explaining the inflation rate. We recommend that policy makers pursuing price stability in the economy focus on exchange rates and interest rate policy with great caution.

RETRACTED ARTICLE: Incomplete Exchange Rate Pass-Through: Evidence from Exchange Rate Reform in China

Statement of RetractionThe following article has been withdrawn from publication in the Taylor & Francis journal Emerging Markets Finance and Trade: Dr Yunong Li & Dr Teng Zhang, “Incomplete Exchange Rate Pass-Through: Evidence from Exchange Rate Reform in China”. DOI: 10.1080/1540496X.2016.1243940. Version of Record published online: 05 January 2018.The Editors and Publishers are withdrawing the above article from publication in Emerging Markets Finance and Trade as this paper was previously published in Volume 53, Issue 3 of the same journal. Date of original publication: 27 December 2016; 10.1080/1540496X.2016.1254066.

Exploring international differences in inflation dynamics

Standard closed-economy DSGE models have difficulty replicating the persistence of inflation. We use a multicountry dataset to establish some empirical regularities on persistence and volatility of aggregate consumer prices for 135 countries since 1993. We find both persistence and volatility to be low (high) in developed (developing) countries relative to the full sample average. This pattern is also observed in low (high) inflation countries. We then employ a two-country DSGE framework to investigate the extent to which structural open economy features, such as incomplete exchange rate pass-through, the existence of nontraded goods, and international financial market incompleteness, can help in replicating the persistence and volatility of consumer prices. Our simulation results indicate that the model can replicate the degree of inflation persistence seen in the data for both developed and developing countries, but cannot generate the low levels of volatility observed in developed economies.

Analyzing Trade and Exchange Rate polices in Iran Using a DSGE Model

Reducing the tariff rates is very important to avoid because it negatively affects domestic industries and leads to devaluation of the national money. Such a reduction, indeed, has multidimensional effects. The aim of this paper is to investigate the effects of trade policy and exchange rate policy in Iran in the framework of a DSGE model for an open small oil-exporting economy on the macro economic variables especially imports and exports. The incomplete exchange rate pass-through in the form of nominal rigidity is also discussed in the model. The model parameters are estimated from 1973 – 2014 using the Bayesian method. The results about the Impact impulse-response function show that the positive shock of exchange rate increases the output and employment and decreases the imports. The impact of this shock on exports, although positive, due to its low elasticity, is not strong enough to increase non-oil exports. Additionally, the effects of positive shocks on intermediate goods tariff rates cause a reduction in the import of these goods, increasing the output and employment, and, in general, reduction of total imports and exports. Also, the positive shock of tariffs on consumer’s goods causes to reduce the import of these goods and total imports.