Has Exchange Rate Pass-Through Really Declined? Some Recent Insights from the Literature

Jeannine Bailliu (), Wei Dong and John Murray
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John Murray: Bank of Canada, https://www.bankofcanada.ca/

Bank of Canada Review, 2010, vol. 2010, issue Autumn, 1-8

Abstract: Building on an earlier Review article, the authors critically reassess the premise that exchange rate pass-through (ERPT) has declined in light of recent studies of the issue in the context of a dynamic stochastic general-equilibrium framework. This recent work helps to emphasize the pitfalls of previous studies based on reduced-form models. For example, ERPT to import prices may be larger than the estimated parameters of reduced-form models would indicate. On the other hand, the authors find fairly convincing evidence that measured short-run ERPT to consumer prices has declined because of a shift to more credible monetary policy regimes. In this case, the findings from DSGE models confirm the results from reduced-form models. Insights from recent studies of ERPT based on microdata are examined, and policy implications are discussed.

Date: 2010
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