International Evidence on Shock-Dependent Exchange Rate Pass-Through

Kristin Forbes, Ida Hjortsoe and Tsvetelina Nenova ()

IMF Economic Review, 2020, vol. 68, issue 4, No 1, 763 pages

Abstract: Abstract We analyse the economic conditions (the “shocks”) behind currency movements and show how that analysis can help address a range of questions, focussing on exchange rate pass-through to prices. We build on a methodology previously developed for the UK and adapt this framework so that it can be applied to a diverse sample of countries using widely available data. The paper provides three examples of how this enriched methodology can be used to provide insights into pass-through and other questions. First, it shows that exchange rate movements caused by monetary policy shocks consistently correspond to significantly higher pass-through than those caused by demand shocks in a cross-section of countries, confirming earlier results for the UK. Second, it shows that the underlying shocks (especially monetary policy shocks) are particularly important for understanding the time-series dimension of pass-through, while the standard structural variables highlighted in the previous literature are most important for the cross-section dimension. Finally, the paper explores how the methodology can be used to shed light on the effects of monetary policy and the debate on “currency wars”: it shows that the role of monetary policy shocks in driving the exchange rate has increased moderately since the global financial crisis in advanced economies.

Keywords: Pass-through; Exchange rate; Price level; Inflation; Monetary policy; Currency wars (search for similar items in EconPapers)
JEL-codes: E31 E37 E52 F47 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (15)

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Working Paper: International Evidence on Shock-Dependent Exchange Rate Pass-Through (2020)
Working Paper: International Evidence on Shock-Dependent Exchange Rate Pass-Through (2020)
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DOI: 10.1057/s41308-020-00124-2

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