Pass-through with volatile exchange rates and inflation targeting

Annika Alexius () and Mikaela Holmberg ()
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Annika Alexius: Stockholm University
Mikaela Holmberg: Stockholm University

Review of World Economics (Weltwirtschaftliches Archiv), 2024, vol. 160, issue 2, No 3, 377-387

Abstract: Abstract As central banks struggle against high inflation in the aftermath of the Covid-19 pandemic and the war in the Ukraine, it is essential to understand the open economy aspects of inflation determination. Using a Bayesian VAR with time-varying parameters and stochastic volatility, we analyze the behavior of pass-through across time and in relation to macroeconomic variables. Pass-through increases with the size of the volatility of the exchange rate and the level, variance and persistence of shocks to domestic prices, which is in line with theory. The persistence of exchange rate shocks is associated with higher pass-through only for observations with low inflation. Furthermore, the effect of inflation persistence on pass-through is much higher for exchange rate appreciations than for depreciations.

Keywords: Exchange rates; Inflation; Pass-through; Bayesian time-varying parameter VAR (search for similar items in EconPapers)
JEL-codes: E31 F41 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10290-023-00502-8

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