Exchange Rate Pass-Through: Evidence Based on Vector Autoregression with Sign Restrictions

Document Type

Article

Publication Date

4-1-2012

Abstract

We estimate exchange rate pass-through (PT) into import, producer and consumer price indexes for nine OECD countries, using a method proposed by Uhlig (2005). In a Vector Autoregression (VAR) model, we identify the exchange rate shock by imposing restrictions on the signs of impulse responses for a small subset of variables. These restrictions are consistent with a large class of theoretical models and previous empirical findings. We find that exchange rate PT is less than one at both short and long horizons. Among three price indexes, exchange rate PT is greatest for import price index and smallest for consumer price index. In addition, greater exchange rate PT is found in an economy which has a smaller size, higher import share, more persistent exchange rate, more volatile monetary policy, higher inflation rate, and less volatile aggregate demand. © 2011 Springer Science+Business Media, LLC.

Publication Title

Open Economies Review

Volume

23

Issue

2

First Page

359

Last Page

380

Digital Object Identifier (DOI)

10.1007/s11079-010-9195-8

ISSN

09237992

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