Working Paper

Exchange rate pass-through: evidence based on vector autoregression with sign restrictions

Abstract: We estimate exchange rate pass-through (PT) into import, producer and consumer price indexes for nine OECD countries, using a method proposed by Uhlig (2005). In a Vector Autoregression (VAR) model, we identify the exchange rate shock by imposing restrictions on the signs of impulse responses for a small subset of variables. These restrictions are consistent with a large class of theoretical models and previous empirical findings. We find that exchange rate PT is less than one at both short and long horizons. Among three price indexes, exchange rate PT is greatest for import price index and smallest for consumer price index. In addition, greater exchange rate PT is found in an economy which has a smaller size, higher import share, more persistent exchange rate, more volatile monetary policy, higher inflation rate, and less volatile aggregate demand.

JEL Classification: F31; F41;

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Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2011

Number: 70

Pages: 34 pages

Note: Published as: An, Lisa and Jian Wang (2012), "Exchange Rate Pass-through: Evidence Based on Vector Autoregression with Sign Restrictions," Open Economies Review 23 (2): 359-380.