Pass-Through of Exchange Rate Changes and Macroeconomic Shocks to Domestic Inflation in East Asian Countries

Takatoshi Ito (), Yuri Sasaki and Kiyotaka Sato

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: We examine the pass-through effects of exchange rate changes on the domestic prices among the East Asian countries using the conventional pass-through equation and a VAR analysis. First, dynamics of pass-through from the exchange rate to import prices and consumer prices is analyzed using the conventional model of pass-through based on the micro-foundations of the exporter's pricing behavior. Both the short-run and long-run elasticities of the exchange rate pass-through are estimated. Second, a vector autoregression (VAR) technique is applied to the pass-through analysis. A Choleski decomposition is used to identify structural shocks and to examine the pass-through of each shock to domestic price inflation by the impulse response function and variance decomposition analyses. Both the conventional analysis and VAR analysis show that while the degree of exchange rate pass-through to import prices is quite high in the crisis-hit countries, the pass-through to CPI is generally low, with a notable exception of Indonesia. The VAR analysis shows that the size of the pass-through of monetary shocks is even larger in Indonesia. Thus, it was Indonesia's accommodative monetary policy as well as the high degree of the CPI responsiveness to exchange rates that contributed to high domestic price inflation, resulting in the loss of its export competitiveness, even when the currency depreciated sharply in nominal terms in 1997-98.

Pages: 55 pages
Date: 2005-05
New Economics Papers: this item is included in nep-fin, nep-ifn, nep-mac, nep-mon and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

Downloads: (external link)
https://www.rieti.go.jp/jp/publications/dp/05e020.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eti:dpaper:05020

Access Statistics for this paper

More papers in Discussion papers from Research Institute of Economy, Trade and Industry (RIETI) Contact information at EDIRC.
Bibliographic data for series maintained by TANIMOTO, Toko ().