Shock-Dependent Exchange Rate Pass-Through: Evidence Based on a Narrative Sign Approach
Lian An (),
Mark Wynne () and
Ren Zhang ()
No 379, Globalization Institute Working Papers from Federal Reserve Bank of Dallas
This paper studies shock-dependent exchange rate pass-through for Japan with a Bayesian structural vector autoregression model. We identify the shocks by complementing the traditional sign and zero restrictions with narrative sign restrictions related to the Plaza Accord. We find that the narrative sign restrictions are highly informative, and substantially sharpen and even change the inferences of the structural vector autoregression model originally identified with only the traditional sign and zero restrictions. We show that there is a significant variation in the exchange rate pass-through across different shocks. Nevertheless, the exogenous exchange rate shock remains the most important driver of exchange rate fluctuations. Finally, we apply our model to “forecast” the dynamics of the exchange rate and prices conditional on certain foreign exchange interventions in 2018, which provides important policy implications for our shock-identification exercise.
Keywords: Exchange Rate Pass-Through; Inflation Forecasting; Narrative Sign Restrictions; Structural Scenario Analysis (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-ets, nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:87486
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