Exchange rate pass-through into import prices revisited: What drives it?

Brun-Aguerre, R., Fuertes, A. & Phylaktis, K. (2012). Exchange rate pass-through into import prices revisited: What drives it?. Journal of International Money and Finance, 31(4), pp. 818-844. doi: 10.1016/j.jimonfin.2012.01.009

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Abstract

A large sample of developed and emerging economies is utilized to investigate import exchange rate pass-through. Panel models reveal that various economic aspects of the destination country can explain about one third of the total variation in pass-through elasticities and the remaining variation comes largely in the form of unobserved country-specific effects. Inflation, exchange rate volatility, openness and relative wealth play a clear role as drivers of emerging markets' pass-through whereas the output gap and protectionism appear influential more generally. Nonlinearity regarding large-versus-small changes in the exchange rate is quite pervasive. Our evidence challenges the widely-held view that pass-through has been universally falling in developed markets and that it is higher for emerging markets. The economic drivers are shown to play a role as out-of-sample predictors of pass-through. The findings confirm pricing-to-market theories and have implications for the optimal conduct of monetary policy.

Item Type: Article
Additional Information: NOTICE: this is the author’s version of a work that was accepted for publication in Journal of International Money and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of International Money and Finance, Volume 31, Issue 4, June 2012, http://dx.doi.org/10.1016/j.jimonfin.2012.01.009
Uncontrolled Keywords: Asymmetry, Emerging markets, Exchange rate, Pass-through, Prices, Protectionism
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Finance
URI: http://openaccess.city.ac.uk/id/eprint/6417

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