An, Lian (2006): Exchange Rate Pass-Through:Evidence Based on Vector Autoregression with Sign Restrictions.
Download (328kB) | Preview
Abstract: This paper provides cross-country and time-series evidence on the extent of exchange rate pass-through at different stages of distribution - import prices, producer prices and consumer prices - for eight major industrial countries: United States, Japan, Canada, Italy, UK, Finland, Sweden and Spain. The analysis is based on a vector autoregreesion (VAR) model that includes the distribution chain of pricing. Instead of the conventional choleski decomposition as used in the literature, I propose to identify the exchange rate shock by the more recent sign restriction approach. For the first time in the literature, estimates of pass-through based on the sign restriction procedure are provided. I find exchange rate pass-through incomplete in many horizons, though complete pass-through is observed occasionally. The degree of pass-through declines and time needed for complete pass-through lengthens along the distribution chain. Furthermore, I find that a greater pass-through coefficient is associated with an economy that is smaller in size with higher import shares, more persistent and less volatile exchange rates, more volatile monetary shocks, higher inflation rate, and less volatile GDP.
|Item Type:||MPRA Paper|
|Original Title:||Exchange Rate Pass-Through:Evidence Based on Vector Autoregression with Sign Restrictions|
|Keywords:||Keywords: pass-through; vector autoregression; sign restrictions; exchange rates|
|Subjects:||F - International Economics > F3 - International Finance > F31 - Foreign Exchange
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
|Depositing User:||Lian An|
|Date Deposited:||25. Oct 2006|
|Last Modified:||15. Feb 2013 21:33|
Reference: Bache, I.W., 2005 “Assessing the Structural VAR Approach to Exchange Rate Pass-through,” Norges Bank Working Paper, No. 31 Bacchetta, P., and Van Wincoop, E., 2002 “Why Do Consumer Prices React Less than Import Prices to Exchange Rates?” NBER Working Papers, No. 9352 Balliu. J. and Bouakez., H. 2004 “Exchange Rate Pass-through in Industrialized Countries,” Bank of Canada Review, pp.19-28 Berben, R., 2004 “Exchange Rate Pass-through in the Netherlands: Has it Changed?” Applied Economics Letters, 11, 141-143. Billmeier, A. and Bonato, L., 2004 “Exchange Rate Pass-through and Monetary Policy in Croatia,” Journal of Comparative Economics, 32, 426-444. Campa, J.M. and Goldberg, L.S., 2005 “Exchange Rate Pass-through into Import Prices,” The Review of Economics and Statistics, 87, 660-679 Campa, J.M.,Goldberg, L.S. and Gonzalez-Minguez J.M., 2005 “Exchange Rate Pass-through to Import Prices in the Euro Area,” NBER Working Papers, No.11632. Choudhri, E.U. and Hakura. D.S., 2001 “Exchange Rate Pass-through to Domestic Prices: Does the Inflationary Environment Matter?” IMF Working Papers, No.01/194.. Choudhri, E.U., Faruqee, H. and Hakura, D.S., 2005 “Explaining the Exchange Rate Pass-through in Different Prices,” Journal of International Economics, 65, 379-374 Canova, F., and G..De Nicolo, 2002 “Monetary Disturbances Matter for Business Fluctuations in the G-7,” Journal of Monetary Economics, 49, 1131-1159. Coricelli, F., Jazbec, B. and Masten, I., 2006 “Exchange Rate Pass-through in EMU Acceding Countries: Empirical Analysis and Policy Implications,” Journal of Banking and Finance, 30, 1375-1391 Dornbusch, R., 1987 “Exchange Rates and Prices,” American Economic Review, 77, 93-106. Doan, T., 2004 “RATS User’s Guide” Version 6, Estima. Doyle, E., 2004 “Exchange Rate Pass-through in a Small Open Economy: the Anglo-Irish Case,” Applied Economics,36, 443-455. Faruqee, H., 2004 “Exchange Rate Pass-through in the Euro Area: The Role of Asymmetric Pricing Behavior,” IMF Working Paper, No.04/14. Fuller, W., 1976 “Introduction to Statistical Time Series,” Wiley, New York. Goldberg, P.K. and Knetter, M.K.,1997 “Goods Prices and Exchange Rates: What have we Learned?” Journal of Economic Literature, 35, 1243-1272. Gagnon, J. E., and J. Ihrig (2004): “Monetary Policy and Exchange Rate Pass-Through,”International Journal of Finance and Economics, 9, 315–338. GoldFajn, I. and Werlang, S.R.C., 2003 “The Pass-through form Depreciation to Inflation: A Panel Study,” Banco Central de Brasil Working Paper, No. 5 Elke Hahn “Pass-through of External Shocks to Euro Area Inflation,” European Central Bank Working Papers, No. 243. Gueorguiev N., 2003 “Exchange Rate Pass-through in Romania,” IMF Working Papers, No. 03/130 Hung W., Kim Y. and Ohno K., 1993 “Pricing Exports: a Cross-country Study,” Journal of International Money and Finance, 12, 3-28 Ito T., Sasaki Y.N. and Sato K., 2005 “Pass-through of Exchange Rate Changes and Macroeconomic Shocks to Domestic Inflation in East Asian Countries,” RIETI Discussion Paper Series , No. 05-E-020. Kara, H. and OGUNC, F., 2005 “Exchange Rate Pass-through in Turkey: It is Slow, but is it Really Low?” Central Bank of the Republic of Turkey Working Paper, No. 0510 Kenny, G. and McGettigan, D., 1998 “Exchange Rates and Import Prices for a Small Open Economy: the Case of Ireland,” Applied Economics, 30, 1147-1155. Kikuchi, A. and Sumner, M., 2002 “Exchange Rate Pass-through in Japanese Export Pricing,” Applied Economics, 34, 279-284. Kim, Y., 1990 “Exchange Rates and Import Prices in the United States: A Varying-Parameter Estimation of Exchange-Rate Pass-through,” Journal of Business and Economic Statistics, 8, 305-315 Kiptui, M., Ndolo, D. and Kaminchia, S., 2005 “Exchange Rate Pass-through: to What Extent Do Exchange Rate Fluctuations Affect Import Prices and Inflation in Kenya?” Central Bank of Kenya Working Papers, No.1. Mann, C.L., 1986 “Prices, Profit Margins and Exchange Rates,” Federal Reserve Bulletin 72 , 366-79. McCarthy, J., 2000 “Pass-through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies,” BIS Working Papers, No.79. Menon J., 1995 “Exchange Rates and Import Prices for a Small Open Economy,” Applied Economics, 27, 297-301. Menon, J., 1995 “Exchange Rate Pass-through,” Journal of Economic Surveys, 9, 197-231 Olivei, G..P., 2004 “Exchange Rates and the Prices of Manufacturing Products Imported into the United States,” New England Economic Review, issue Q 1, 3-18.. Pauls, B.D. and Helkie, W.L. “A reassessment of Measures of the Dollar’s Effective Exchange Value,” International Finance Discussion Paper 306, Board of Governors of the Federal Reserve System, Washington, DC. Peersman, G., 2004 “What Caused the Early Millennium Slowdown? Evidence Based on Vector Autoregressions,” CEPR Discussion Paper, No. 4087 Rowland, P., 2003 “Exchange Rate Pass-through to Domestic Prices: The Case of Colombia,” Banco de la Republica Working Papers, No. 001635 Rudebusch, G. D., 1998 “Do Measures of Monetary Policy in a VAR make sense?” International Economic Review, 39, 907-931. Shambaugh, J., 2003 “A New Look at Pass-through,” Dartmouth College Working Papers. Sims, C., 1988 “Bayesian Skepticism on Unit Root Econometrics,” Journal of Economic Dynamics and Control, 12, 463-474. Taylor, J.B., 2000 “Low Inflation, Pass-through, and the Pricing Power of Firms,” European Economic Review, 44, 1389-1408. Toh, M.H and Ho, H.J., 2001 “Exchange Rate Pass-through for Selected Asian Economies,” The Singapore Economic Review, 46, 247-273 Uhlig H., 2005 “What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure,” Journal of Monetary Economics, 52, 381-419. Yang J.W., 1997 “Exchange Rate Pass-through in U.S. Manufacturing Industries,” The Review of Economics and Statistics, 79, 95-104 Yang J.W., 1998 “Pricing-to-Market in U.S. Imports and Exports: A Time Series and Cross-Sessional Study,” The Quarterly Review of Economics and Finance, 38, 843-861