EconPapers    
Economics at your fingertips  
 

The shocks matter: Improving our estimates of exchange rate pass-through

Kristin Forbes, Ida Hjortsoe and Tsvetelina Nenova

Journal of International Economics, 2018, vol. 114, issue C, 255-275

Abstract: A major challenge for monetary policy is predicting how exchange rate movements will impact inflation. We propose a new focus: directly incorporating the underlying shocks that cause exchange rate fluctuations when evaluating how these fluctuations “pass through” to import and consumer prices. A standard open-economy model shows that the relationship between exchange rates and prices depends on the shocks which cause the exchange rate to move. We build on this to develop a structural Vector Autoregression (SVAR) framework for a small open economy and apply it to the UK. We show that prices respond differently to exchange rate movements based on what caused the movements. For example, exchange rate pass-through is low in response to domestic demand shocks and relatively high in response to domestic monetary policy shocks. This framework can improve our ability to estimate how pass-through can change over short periods of time. For example, it can explain why sterling's post-crisis depreciation caused a sharper increase in prices than expected, while the effect of sterling's 2013–15 appreciation was more muted. We also apply this framework to forecast the extent of pass-through from sterling's sharp depreciation corresponding to the UK's vote to leave the European Union.

Keywords: Pass through; Exchange rate; Inflation forecasting; Monetary policy (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022199618302009
Full text for ScienceDirect subscribers only

Related works:
Working Paper: The Shocks Matter: Improving our Estimates of Exchange Rate Pass-Through (2018) Downloads
Working Paper: The Shocks Matter: Improving Our Estimates of Exchange Rate Pass-Through (2018) Downloads
Working Paper: The shocks matter: improving our estimates of exchange rate pass-through (2015) Downloads
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:eee:inecon:v:114:y:2018:i:c:p:255-275

Access Statistics for this article

Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and Rodríguez-Clare, Andrés

More articles in Journal of International Economics from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2019-03-31
Handle: RePEc:eee:inecon:v:114:y:2018:i:c:p:255-275