Exchange Rate Pass-Through to Consumer Prices: The Increasing Role of Energy Prices
Ying Lin and
No auwp2019-01, Auburn Economics Working Paper Series from Department of Economics, Auburn University
A group of researchers has asserted that the rate of exchange rate pass-through (ERPT) to domestic prices has declined substantially over the last few decades. We revisit this claim of a downward trend in ERPT to the Consumer Price Index (CPI) in a vector autoregressive (VAR) model for US macroeconomic data under the current floating exchange rate regime. Our VAR approach nests the conventional single equation method, revealing very weak evidence of ERPT during the pre-1990 era, but statistically significant evidence of ERPT during the post-1990 era, sharply contrasting with previous findings. After statistically confirming a structural break in ERPT to total CPI via Hansen's (2001) test procedure, we seek the source of the structural break with disaggregated level CPIs, pinning down a key role of energy prices in the break. The dependency of US energy consumption on imports increased since the 1990s until the recent recession. This change magnifies effects of the exchange rate shocks on domestic energy prices, resulting in greater responses of the total CPI via this energy price channel.
Keywords: Exchange Rate Pass Through; Disaggregated CPI; Structural Break; Oil Price Shock (search for similar items in EconPapers)
JEL-codes: E31 F31 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-int, nep-mac, nep-mon and nep-opm
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Journal Article: Exchange Rate Pass-Through to Consumer Prices: The Increasing Role of Energy Prices (2021)
Working Paper: Exchange Rate Pass-Through to Consumer Prices: The Increasing Role of Energy Prices (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:abn:wpaper:auwp2019-01
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