Monetary policy and exchange rate pass-through This article is a U.S. Government work and is in the public domain in the U.S.A
Joseph Gagnon and
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Jane Ihrig: Board of Governors of the Federal Reserve System, USA, Postal: Board of Governors of the Federal Reserve System, USA
International Journal of Finance & Economics, 2004, vol. 9, issue 4, 315-338
The pass-through of exchange rate changes into domestic inflation appears to have declined in many countries since the 1980s. We develop a theoretical model that attributes the change in the rate of pass-through to increased emphasis on inflation stabilization by many central banks. This hypothesis is tested on 20 industrial countries between 1971 and 2003. We find widespread evidence of a robust and statistically significant link between estimated rates of pass-through and inflation variability. We also find evidence that observed monetary policy behaviour may be a factor in the declining rate of pass-through. Published in 2004 by John Wiley & Sons, Ltd.
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