Monetary Policy Credibility and Exchange Rate Pass-Through
IMF Working Papers, December 13, 2016
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Bibliographic details
- Authors: Yan Carriere-Swallow, Bertrand Gruss, Nicolas E Magud, Fabian Valencia
- Published: December 13, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475560312.001
Summary
- A long-standing conjecture in macroeconomics is that recent declines in exchange rate pass-through are in part due to improved monetary policy performance.
- In a large sample of emerging and advanced economies, the authors find evidence of a strong link between exchange rate pass-through to consumer prices and the monetary policy regime’s performance in delivering price stability.
- Using input-output tables, the paper decomposes exchange rate pass-through to consumer prices into:
- a component that reflects the adjustment of imported goods at the border, and
- a component that captures the response of all other prices.
- The analysis finds that price stability and central bank credibility have reduced the second component (the response of all other prices).
Methodology and Analytical Approach
- Empirical analysis covers a large sample of emerging and advanced economies.
- Decomposition of pass-through relies on input-output tables to separate border-adjusting imported goods from domestic-price responses.
- Pass-through is measured with reference to consumer prices and is linked to indicators of monetary policy performance and credibility.
Key Findings
- There is a strong empirical link between exchange rate pass-through to consumer prices and the monetary policy regime’s effectiveness in delivering price stability.
- The decline in pass-through mainly reflects a reduction in the component capturing the response of non-border prices (i.e., "all other prices"), which is associated with improved price stability and central bank credibility.
- The component reflecting adjustment of imported goods at the border is treated separately and is not the primary channel through which credibility reduces overall pass-through.
Policy Implications
- Strengthening monetary policy credibility and delivering sustained price stability can reduce the degree to which exchange rate movements are transmitted into domestic consumer prices (via the non-border price channel).
- Central banks aiming to insulate domestic inflation from exchange rate shocks should prioritize policies and communications that enhance credibility and anchor inflation expectations.
Scope and Subjects
- Focus areas include: Consumer prices, Exchange rate pass-through, Foreign exchange, Import prices, Inflation, Nominal effective exchange rate, Prices.
- The study examines both emerging and advanced economies in a large-sample empirical framework.
Source: IMF Working Paper "Monetary Policy Credibility and Exchange Rate Pass-Through" (authors and publication details as listed on the source page).
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