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Inflation and Exchange Rate Pass-Through (English)

The degree to which domestic prices adjust to exchange rate movements is key to understanding inflation dynamics, and hence to guiding monetary policy. However, the exchange rate pass-through to inflation varies considerably across countries and over time. By estimating structural factor-augmented vector-autoregressive models for 47 countries, this paper brings to light two fundamental factors accounting for these variations: the nature of the shock triggering currency movements and country-specific characteristics. The empirical results in this paper are three-fold. First, an empirical investigation demonstrates that different domestic and global shocks can be associated with widely different pass-through ratios. Second, country characteristics matter, including policy frameworks that govern monetary policy responses, as well as other structural features that affect an economy's sensitivity to currency fluctuations. Pass-through ratios tend to be lower in countries that combine flexible exchange rate regimes and credible inflation targets. Finally, the empirical results suggest that central bank independence can greatly facilitate the task of stabilizing inflation following large currency movements and allows fuller use of the exchange rate as a buffer against external shocks.

Details

  • Author

    Ha,Jongrim, Stocker,Marc, Yilmazkuday,Hakan

  • Document Date

    2019/03/13

  • Document Type

    Policy Research Working Paper

  • Report Number

    WPS8780

  • Volume No

    1

  • Total Volume(s)

    1

  • Country

    World,

  • Region

    The World Region,

  • Disclosure Date

    2019/03/13

  • Disclosure Status

    Disclosed

  • Doc Name

    Inflation and Exchange Rate Pass-Through

  • Keywords

    inflation; exchange rate movement; advanced economy; trade and investment; exchange rate pass; monetary policy; flexible exchange rate regime; National Institute of Public Finance; effect of exchange rate change; nominal effective exchange rate; currency movement; increase consumer price; terms of trade shock; Exchange Rates; short period of time; domestic price of imports; gross domestic product deflator; dollar exchange rate; endogenous exchange rate; credible monetary policy framework; bank for international settlement; oil price; global shocks; consumer price inflation; domestic shock; import price; domestic monetary policy; exchange rate fluctuation; inflation targeting; domestic interest rate; domestic demand; nominal exchange rate; global financial crisis; currency depreciation; share of import; flexible currency regime; global value chain; exchange rate channel; current account deficit; increase in inflation; bank of canada; nominal interest rate; domestic output growth; share of trade; degree of competition; floating exchange rate; volatile exchange rate; inflation targeting framework; independent central bank; fiscal policy framework; positive interest rate; exchange rate shock; oil price change; source of shock; west texas intermediate; treasury bill rate; evolution over time; external debt management; Foreign Exchange Reserve; interest rate differential; current account surplus; private sector risk; exchange rate dynamic; variance of inflation; monetary policy decision; real exchange rate; Innovation and Productivity; bank of england; global inflation; global output; export price; global demand; risk premium; impulse response; foreign currency; inflation expectation; vector autoregression; currency appreciation; standard deviation; domestic supply; price stability; domestic currencies; commodity exporter; empirical study

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Citation

Ha,Jongrim Stocker,Marc Yilmazkuday,Hakan

Inflation and Exchange Rate Pass-Through (English). Policy Research working paper,no. WPS 8780 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/880231552490402888/Inflation-and-Exchange-Rate-Pass-Through