Inflation and Exchange Rate Pass-Through
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 ov...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2019
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/880231552490402888/Inflation-and-Exchange-Rate-Pass-Through http://hdl.handle.net/10986/31406 |
| Summary: | 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. |
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