Time-varying exchange rate pass-through: experiences of some industrial countries

Abstract:

This paper estimates exchange rate pass-through of six major industrial countries using a time-varying parameter with stochastic volatility model. Exchange rate pass-through is divided into impacts of exchange rate fluctuations to import prices (first-stage pass-through) and those of import price movements to consumer prices (second-stage pass-through). The paper finds that both stages of pass-through have declined over time for all the sample countries. The decline in second-stage pass-through is associated with the emergence of the low and stable inflation environment as well as a rise in import penetration, while the relationship to the inflation environment is weak for first-stage pass-through.

JEL classification: F40, E58, C11, E31, F41

Keywords: exchange rate pass-through, impacts of commodity prices, time-varying parameter, stochastic volatility, Markov Chain Monte Carlo