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Exchange rate pass-through into import prices revisited: What drives it?

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  • Brun-Aguerre, Raphael
  • Fuertes, Ana-Maria
  • Phylaktis, Kate

Abstract

A large sample of developed and emerging economies is utilized to investigate import exchange rate pass-through. Panel models reveal that various economic aspects of the destination country can explain about one third of the total variation in pass-through elasticities and the remaining variation comes largely in the form of unobserved country-specific effects. Inflation, exchange rate volatility, openness and relative wealth play a clear role as drivers of emerging markets’ pass-through whereas the output gap and protectionism appear influential more generally. Nonlinearity regarding large-versus-small changes in the exchange rate is quite pervasive. Our evidence challenges the widely-held view that pass-through has been universally falling in developed markets and that it is higher for emerging markets. The economic drivers are shown to play a role as out-of-sample predictors of pass-through. The findings confirm pricing-to-market theories and have implications for the optimal conduct of monetary policy.

Suggested Citation

  • Brun-Aguerre, Raphael & Fuertes, Ana-Maria & Phylaktis, Kate, 2012. "Exchange rate pass-through into import prices revisited: What drives it?," Journal of International Money and Finance, Elsevier, vol. 31(4), pages 818-844.
    • Handle: RePEc:eee:jimfin:v:31:y:2012:i:4:p:818-844
    DOI: 10.1016/j.jimonfin.2012.01.009
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    More about this item

    Keywords

    Pass-through; Exchange rate; Asymmetry; Prices; Emerging markets; Protectionism;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F30 - International Economics - - International Finance - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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