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Exchange Rate Changes and Inflation in Post-Crisis Asian Economies: VAR Analysis of the Exchange Rate Pass-Through

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Takatoshi Ito
Kiyotaka Sato

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Abstract

The pass-through effects of exchange rate changes on the domestic prices in the East Asian countries are examined using a VAR analysis including several price indices and domestic macroeconomic variables as well as the exchange rate. Results from the VAR analysis show that (1) the degree of exchange rate pass-through to import prices was quite high in the crisis-hit countries; (2) the pass-through to CPI was generally low, with a notable exception of Indonesia: and (3) in Indonesia, both the impulse response of monetary policy variables to exchange rate shocks and that of CPI to monetary policy shocks are positive, large and statistically significant. Thus, Indonesia's accommodative monetary policy as well as the high degree of the CPI responsiveness to exchange rate changes was important factors that resulted in the spiraling effects of domestic price inflation and sharp nominal exchange rate depreciation in the post-crisis period.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 06018.

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Length: 45 pages
Date of creation: Apr 2006
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Handle: RePEc:eti:dpaper:06018

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Campa, José Manuel & Goldberg, Linda S & González Mìnguez, Jose Manuel, 2005. "Exchange Rate Pass-Through to Import Prices in the Euro Area," CEPR Discussion Papers 5347, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Caporale, Guglielmo Maria & Cipollini, Andrea & Demetriades, Panicos O., 2005. "Monetary policy and the exchange rate during the Asian crisis: identification through heteroscedasticity," Journal of International Money and Finance, Elsevier, vol. 24(1), pages 39-53, February. [Downloadable!] (restricted)
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  3. Knetter, Michael M, 1989. "Price Discrimination by U.S. and German Exporters," American Economic Review, American Economic Association, vol. 79(1), pages 198-210, March. [Downloadable!] (restricted)
  4. José Manuel Campa & Linda S. Goldberg, 2005. "Exchange Rate Pass-Through into Import Prices," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 679-690, December. [Downloadable!] (restricted)
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  5. Ito, Takatoshi & Ogawa, Eiji & Sasaki, Yuri Nagataki, 1998. "How Did the Dollar Peg Fail in Asia?," Journal of the Japanese and International Economies, Elsevier, vol. 12(4), pages 256-304, December. [Downloadable!] (restricted)
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  6. Feenstra, Robert C., 1989. "Symmetric pass-through of tariffs and exchange rates under imperfect competition: An empirical test," Journal of International Economics, Elsevier, vol. 27(1-2), pages 25-45, August. [Downloadable!] (restricted)
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  7. Campa, José Manuel & Goldberg, Linda S, 2006. "Distribution Margins, Imported Inputs and the Insensitivity of the CPI to Exchange Rates," CEPR Discussion Papers 5650, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  8. Hamid Faruqee, 2004. "Exchange Rate Pass-Through in the Euro Area: The Role of Asymmetric Pricing Behavior," IMF Working Papers 04/14, International Monetary Fund. [Downloadable!]
  9. Todd E. Clark, 1999. "The Responses Of Prices At Different Stages Of Production To Monetary Policy Shocks," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 420-433, August. [Downloadable!] (restricted)
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  10. Ross H. McLeod, 2003. "Towards improved monetary policy in Indonesia," Bulletin of Indonesian Economic Studies, Taylor and Francis Journals, vol. 39(3), pages 303-324, December. [Downloadable!] (restricted)
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  11. Jonathan McCarthy, 2000. "Pass-through of exchange rates and import prices to domestic inflation in some industrialized economies," Staff Reports 111, Federal Reserve Bank of New York. [Downloadable!]
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  12. Marston, Richard C., 1990. "Pricing to market in Japanese manufacturing," Journal of International Economics, Elsevier, vol. 29(3-4), pages 217-236, November. [Downloadable!] (restricted)
  13. Elke Hahn, 2003. "Pass-through of external shocks to euro area inflation," Working Paper Series 243, European Central Bank. [Downloadable!]
  14. Otani, Akira & Shiratsuka, Shigenori & Shirota, Toyoichiro, 2006. "Revisiting the Decline in the Exchange Rate Pass-Through: Further Evidence from Japan's Import Prices," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 24(1), pages 61-75, March. [Downloadable!]
  15. Giovanni P. Olivei, 2002. "Exchange rates and the prices of manufacturing products imported into the United States," New England Economic Review, Federal Reserve Bank of Boston, issue Q 1, pages 3 - 18. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Dubravko Mihaljek & Marc Klau, 2008. "Exchange rate pass-through in emerging market economies: what has changed and why?," BIS Papers chapters, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 103-130 Bank for International Settlements. [Downloadable!]
  2. Craig R. Parsons & Kiyotaka Sato, 2008. "New estimates of exchange rate pass-through in Japanese exports

    An earlier version of this paper was presented at the 10th International Conven," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(2), pages 174-183. [Downloadable!]

  3. Sek, Siok Kun & Kapsalyamova, Zhanna, 2008. "Exchange rate pass-through and volatility: Impacts on domestic prices in four Asian countries," MPRA Paper 11130, University Library of Munich, Germany, revised 26 Oct 2008. [Downloadable!]
  4. Hiroshi Fujiki & nd Akiko Terada-Hagiwara, 2007. "Financial Integration in East Asia," IMES Discussion Paper Series 07-E-12, Institute for Monetary and Economic Studies, Bank of Japan. [Downloadable!]
    Other versions:
  5. Antonio Forte, 2009. "The pass-through effect: a twofold analysis," EERI Research Paper Series EERI_RP_2009_08, Economics and Econometrics Research Institute (EERI). [Downloadable!]
    Other versions:
  6. Carlos Cortinhas, 2007. "Exchange Rate Pass-Through in ASEAN: Implications for the Prospects of Monetary Integration in the Region," NIPE Working Papers 2/2007, NIPE - Universidade do Minho. [Downloadable!]
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