Can exchange rate pass-throughs be perverse? A robust multiple-prior Bayesian SVAR approach*

Yushi Yoshida and Weiyang Zhai

Journal of International Money and Finance, 2025, vol. 154, issue C

Abstract: We apply a robust multiple-prior structural VAR model to estimate the exchange rate pass-through of Japan between January 1995 and July 2023, covering the unconventional monetary policy regime. In addition to traditional sign restrictions, we impose narrative sign restrictions on the basis of two economic episodes. According to conventional confidence intervals, the estimated exchange rate pass-through induced by exogenous exchange rate shocks or persistent global shocks is consistent with the conventional view; i.e., the depreciation of the Japanese yen induces inflation at the consumer level. On the other hand, we find evidence of a perverse exchange rate pass-through induced by demand shock. However, according to robust credible intervals, only the exchange rate pass-through induced by demand shock remains statistically significant. Thus, the demand-shock-induced exchange rate pass-through effect may be undermining the continuous efforts of the Bank of Japan to achieve the target of a two-percent inflation rate.

Keywords: Exchange rate pass-through; Narrative sign restrictions; Robust multiple-prior Bayesian; Structural VAR; Unconventional monetary policy (search for similar items in EconPapers)
JEL-codes: E31 F31 F41 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:154:y:2025:i:c:s0261560625000476

DOI: 10.1016/j.jimonfin.2025.103312

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