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Pass-through with volatile exchange rates and inflation targeting

Author

Listed:
  • Annika Alexius

    (Stockholm University)

  • Mikaela Holmberg

    (Stockholm University)

Abstract

As central banks struggle against high inflation in the aftermath of the Covid-19 pandemic and the war in the Ukraine, it is essential to understand the open economy aspects of inflation determination. Using a Bayesian VAR with time-varying parameters and stochastic volatility, we analyze the behavior of pass-through across time and in relation to macroeconomic variables. Pass-through increases with the size of the volatility of the exchange rate and the level, variance and persistence of shocks to domestic prices, which is in line with theory. The persistence of exchange rate shocks is associated with higher pass-through only for observations with low inflation. Furthermore, the effect of inflation persistence on pass-through is much higher for exchange rate appreciations than for depreciations.

Suggested Citation

  • Annika Alexius & Mikaela Holmberg, 2024. "Pass-through with volatile exchange rates and inflation targeting," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 160(2), pages 377-387, May.
    • Handle: RePEc:spr:weltar:v:160:y:2024:i:2:d:10.1007_s10290-023-00502-8
    DOI: 10.1007/s10290-023-00502-8
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    More about this item

    Keywords

    Exchange rates; Inflation; Pass-through; Bayesian time-varying parameter VAR;
    All these keywords.

    JEL classification:

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

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