Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation

Jeannine Bailliu () and Eiji Fujii

Staff Working Papers from Bank of Canada

Abstract: This paper investigates the question of whether a transition to a low-inflation environment, induced by a shift in monetary policy, results in a decline in the degree of pass-through of exchange rate movements to consumer prices. It differs from previous empirical work in its focus on the identification of changes in the inflation environment and its use of a panel-data approach. Evidence from a panel-data set of 11 industrialized countries over the period from 1977 to 2001, supports the hypothesis that exchange rate pass-through declines with a shift to a low-inflation environment brought about by a change in the monetary policy regime. More specifically, the results suggest that pass-through to import, producer, and consumer price inflation declined following the inflation stabilization that occurred in many industrialized countries in the early 1990s but did not decline following a similar episode in the 1980s. Several potential explanations for this finding are discussed, including the possibility that changes in the monetary policy regimes implemented in the 1990s were perceived as more credible than those carried out in the 1980s, and the possibility that the credibility of the new monetary policy regimes was acquired over time.

Keywords: Inflation and Prices; Exchange Rates; International Topics (search for similar items in EconPapers)
JEL-codes: E31 E42 F31 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2004
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (202)

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Working Paper: Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:04-21

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