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Country and Time Variation in Exchange Rate Pass Through: What Drives it?

Fuertes, A-M. ORCID: 0000-0001-6468-9845 (2012). Country and Time Variation in Exchange Rate Pass Through: What Drives it?. Journal of International Money and Finance, 31(4), pp. 818-844. doi: 10.1016/j.jimonfin.2012.01.009

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.

Publication Type: Article
Additional Information: © 2012, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: Pass-through; Exchange rate; Asymmetry; Prices; Emerging markets; Protectionism
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
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