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Shock-dependent exchange rate pass-through: Evidence based on a narrative sign approach for Japan

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  • An, Lian
  • Wynne, Mark A.
  • Zhang, Ren

Abstract

This paper studies shock-dependent exchange rate pass-through for Japan with a Bayesian structural vector autoregression model. We identify the structural shocks by complementing the traditional sign and zero restrictions with narrative sign restrictions related to the Plaza Accord. We find that the narrative sign restrictions are highly informative. They substantially sharpen and even change the inferences of the exchange rate shock originally identified with only the traditional sign and zero restrictions through distinguishing the exchange rate shock from the demand shock. We apply our model to “forecast” the dynamics of the exchange rate and prices conditional on certain foreign exchange interventions in 2018, which provides important policy implications for our shock-identification exercise.

Suggested Citation

  • An, Lian & Wynne, Mark A. & Zhang, Ren, 2021. "Shock-dependent exchange rate pass-through: Evidence based on a narrative sign approach for Japan," Journal of International Money and Finance, Elsevier, vol. 118(C).
  • Handle: RePEc:eee:jimfin:v:118:y:2021:i:c:s0261560621001133
    DOI: 10.1016/j.jimonfin.2021.102462
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    More about this item

    Keywords

    Exchange rate pass-through; Inflation forecasting; Narrative sign restrictions; Structural scenario analysis;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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