Not All Exchange Rate Movements Are Alike: Exchange Rate Persistence and Pass-Through to Consumer Prices

Toyoichiro Shirota

No 311, Discussion paper series. A from Graduate School of Economics and Business Administration, Hokkaido University

Abstract: This study develops a framework to identify persistent and transitory shocks in exchange-rate movements and to estimate the shock-specific exchange-rate pass-through to domestic prices. The framework combines a dataset of a long time series of exchange-rate forecasts since the 1980s with a range restriction that is a natural generalization of the standard sign restriction. The empirical results show that exchange rate pass-through is higher when a persistent shock dominates exchange-rate movements. The composition of persistent and transitory shocks varies over time. This study asserts that time variations of exchange rate pass-through are at least partly attributable to differences in shock-specific pass-through rates and variations in the composition of shocks over time. Applying our identification procedure to disaggregated prices of the CPI, we also find that a correlation between pass-through coefficients and frequencies of price adjustments is shock dependent. Specifically, the positive correlation, which is reported in Gopinath and Itskhoki [2010], disappears, when exchange-rate movements are transitory.

Keywords: exchange-rate pass-through; exchange-rate persistence; range restriction; survey expectation (search for similar items in EconPapers)
Pages: 22 pages
Date: 2017-09
New Economics Papers: this item is included in nep-cta and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:hok:dpaper:311

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