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Monetary policy and exchange rate pass-through

Joseph Gagnon and Jane E. Ihrig

No 704, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Recent research suggests that the pass-through of exchange rate changes into domestic inflation has declined in many countries since the 1980s. We develop a theoretical model that attributes the change in pass-through (defined as the correlation of inflation with exchange rate changes) to increased emphasis on inflation stabilization by many central banks. This hypothesis is tested on eleven industrial countries between 1971 and 2000. We find widespread evidence of both a decline in pass-through and a decline in the variability of inflation in the 1990s. We also find a statistically significant link between measured pass-through and inflation variability. However, our efforts to correlate the decline in pass-through with estimated changes in monetary policy behavior are inconclusive due to poor estimates of policy behavior.

Keywords: Inflation (Finance); Foreign exchange rates (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn, nep-mon and nep-pbe
Date: 2001
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