Exchange Rate Pass-Through to Domestic Prices: Does the Inflationary Environment Matter?

December 1, 2001

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper tests a hypothesis suggested by Taylor (2000) that a low inflationary environment leads to a low exchange rate pass-through to domestic prices. To test this hypothesis, the paper derives a pass-through relation based on new open economy macroeconomic models. A large database that includes 1979-2000 data for 71 countries is used to estimate this relation. There is strong evidence of a positive and significant association between the pass-through and the average inflation rate across countries and periods. The inflation rate, moreover, dominates other macroeconomic variables in explaining cross-regime differences in the pass-through.

Subject: Consumer price indexes, Exchange rate adjustments, Exchange rate pass-through, Exchange rates, Foreign exchange, Inflation, Prices

Keywords: Africa, Consumer price indexes, CPI pass-through, exchange rate, Exchange rate adjustments, Exchange rate pass-through, Exchange rates, import price pass-through, inflation, inflation rate, inflation regime, Pass-through, pass-through estimate, pass-through measure, pass-through relation, period pass-through, WP

Pages:
36
Volume:
2001
DOI:
https://doi.org/10.5089/9781451859867.001
Issue:
194
Series:
Working Paper No. 2001/194
Stock No:
WPIEA1942001
ISBN:
9781451859867
ISSN:
1018-5941

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