Exchange Rate Pass-Through and Structural Macroeconomic Shocks in Developing Countries: An Empirical Investigation

Karim Barhoumi ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates the exchange rate pass-through in 12 developing countries during the period 1980-2001 by adopting a new formulation . Rather than considering the traditional approach based on the exogenous exchange rate movement through correlation between exchange rate and prices, we focus on fundamental macroeconomic shocks that a¤ect both exchange rate and prices. In order to do that, we employ long-run restrictions à la Blanchard and Quah (1989) to identify the di¤erent shocks through an open economic macroeconomic model (ISLM framework). We use two empirical methodology : Structural VECM methodology used by Jang and Ogaki (2004) and the common trends approach proposed by Warne et al (1992). This allows us to calculate the pass-through as the responses of the exchange rate, CPI and import prices to the supply, the relative demand, the nominal and the foreign prices shocks. We show that the pass-through ratio in developing countries is di¤erent when considering di¤erent structural shocks.

Keywords: Exchange rate pass-through; Developing countries; Long-run restrictions; Structural VECM; Common trend; Impulse response functions (search for similar items in EconPapers)
JEL-codes: C32 E31 F31 (search for similar items in EconPapers)
Date: 2006-10, Revised 2007-10-13
New Economics Papers: this item is included in nep-ifn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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