Exchange Rate Pass-Through in Emerging Markets

Zorzi, Michele Ca’; Hahn, Elke; Sánchez, Marcelo

doi:10.2139/ssrn.970654

Cited by 81 publications

(15 citation statements)

References 31 publications

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“…Many recent empirical studies for the CEE countries, including Beckmann and Fidrmuc (2013), Jimborean (2013), Hájek and Horváth (2015), Hajnal, Molnár, and Várhegyi (2015), Baxa and Šestořád (2019) are in favour of the incomplete ERPT, though in the past high ERPT had been found for Hungary and Poland (Ca′Zorzi, Hahn, & Sánchez, 2007). For 9 CEE countries, Beirne and Bijsterbosch (2011) obtained the ERPT to consumer prices at 0.5 or 0.6 on average using impulse responses or the cointegrated VAR, respectively.…”

Section: Exchange Rate Pass-through To Domestic Pricesmentioning

confidence: 99%

Price and output effects of long-term exchange rate changes: Central and Eastern European countries in 2002-2019

Shevchuk¹

2022

EBER

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The objective of the article is to measure the magnitude of the long-term exchange rate price and output effects in the Central and Eastern European countries (plus Turkey and Russia) which practice flexible exchange rate policies, while controlling for the institutional quality and policy stance as measured by the Index of Economic Freedom (IEF) from the Heritage Foundation database. Research Design & Methods:To analyse long-term price and output effects, the anticipated value of a nominal effective exchange rate was used as obtained by the ARIMA (n,m) model. We analysed the relationships between selected macroeconomic variables with the panel DOLS model using quarterly data from 2002 to 2019. Individual country estimates were provided as well. The study considered alternative specifications for regression models, with control for the money supply and institutional developments. Findings: Our study revealed that anticipated depreciation of the exchange rate was associated with the incomplete exchange rate pass-through (ERPT) into consumer prices and a decrease in output, with the former becoming stronger over the low-inflationary 2010-2019 period. Among other results, there was a trade-off between price and output effects of the money supply. As expected, investments in physical capital were the factor behind higher output. Finally, liberalisation efforts as proxied with the IEF were inflationary and contractionary. Implications & Recommendations: It was demonstrated that policies aimed at gradual strengthening of local currencies could be helpful for both acceleration of output growth and containment of inflation in the long run. At the same time, it is not recommended to proceed with further liberalisation of regulatory environment, as it seems not to bring about any favourable output effects while contributing to higher consumer prices. Contribution & Value Added:The novelty of this study is the estimation of the long-term price and output effects of the anticipated exchange rate while controlling for institutional quality and the progress of market reforms as measured by the IEF. The findings may serve as suggestions for reliable exchange rate policy, with a focus on predictability and the long-term macroeconomic effects.

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Section: Exchange Rate Pass-through To Domestic Pricesmentioning

confidence: 99%

Price and output effects of long-term exchange rate changes: Central and Eastern European countries in 2002-2019

Shevchuk¹

2022

EBER

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“…Different degrees of ERPT could be attributed to the diverse methodological approaches incorporated. From the single equation specifications (Hooper and Mann, 1989; Campa and Goldberg, 2005; Choudri and Hakura, 2006), the econometric approaches shifted to simultaneous models (Zorzi et al , 2007), various Vector Autoregression models (VARs) like the recursive VARs (McCarthy, 2007; Ranadive and Burange, 2015; Mendali and Das, 2017), Structural VARs (Gagnon and Ihrig, 2004; An and Wang, 2012), Vector error correction models Karoro et al (2009); Frankel et al (2012), panel data estimation models (Barhoumi, 2006; Takhtamanova, 2010), threshold regression models (Brun-Aguerre et al , 2012; Cheikh and Louhichi, 2016) and asymmetric cointegration approaches (Delatte and Lopez-Villavicencio, 2012; Yanamandra, 2015; Baharumshah et al , 2017; Amoah and Aziakpono, 2018; Brun-Aguerre et al , 2017; Patra et al , 2018 and Kassi et al , 2019).…”

Section: Empirical Reviewmentioning

confidence: 99%

On the dynamics of exchange rate pass-through: asymmetric evidence from India

Bhat

2021

IJOEM

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PurposeThis paper attempts to examine the transmission of exchange rate changes into the domestic prices together with other important determinants of later, in case of a developing country, namely, India.Design/methodology/approachIn an open economy Philips curve framework, a symmetric model developed by Pesaran et al. (2001) together with a complete asymmetric model developed by Shin et al. (2014) has been applied to assess the transmission of exchange rate changes into the domestic prices (inflation) of India. In addition, non-linear cumulative dynamic multipliers are used to portray the route between disequilibrium position of short run and new long-run equilibrium of the system. The multipliers highlight the asymmetric adjustment paths and/or duration of disequilibrium and therefore add valuable information to the long and short-run asymmetry.FindingsIn symmetric framework, exchange rate pass-through is reported to be incomplete and short-run pass through is found to be lower than the long-run pass through. A contractionary monetary policy stance is observed to decrease inflation in the long-run only and in the short-run, a case for price puzzle is observed, although the coefficient is statistically insignificant. Similarly, the impact of output growth is positive in both the short and long-run and both the coefficients are statically significant. Finally, the oil price inflation is also found to escalate the domestic inflationary pressures in both the short and long run, although the pass-through transmission is lower in the short-run than in the long-run. In case of an asymmetric setting, evidence in favour of directional asymmetry is reported whereby long-run impact of currency appreciation is found to be higher than depreciation. Similarly, a contractionary monetary policy action lowers the inflation, the easy one increases it; however, the impact of both the positive and negative changes in interest rate is found to be symmetric. An increase in GR is found to increase the inflation by a relatively appreciable magnitude than is observed when the fall in GR is reported. The possible reason for this asymmetric response of inflation may be explained in terms of asymmetric behaviour of demand conditions during economic upturns and downturns and downward inflexibility of prices. Finally, the transmission of oil price inflation to domestic inflation is also found to be asymmetric. An increase in oil price inflation leads to an increase in domestic inflation by a higher magnitude. whereas a decrease in it lowers inflation only marginally.Practical implicationsFrom a policy perspective, it is certainly important for the central banks to monitor the exchange rate changes so as to design the appropriate policy actions to resist any inflationary pressures resulting from the external sector. More importantly, a gauge on the factors that lead to destabilizing exchange rate movements or large currency price fluctuations is highly warranted. The results also highlight the relevance of proper domestic demand management and lowering dependence on oil imports to avoid the unnecessary inflation pressures in the economy.Originality/valueWhile some studies have explored the possibilities of asymmetric interactions in the case of India, however, these studies have considered only the partial asymmetric model specifications and have not included a well-established theoretical base to include the other potential determinants of inflation as well. In this regard, the authors applied a complete asymmetric model specification developed by Shin et al. (2014) in an open economy Philips curve framework to assess the transmission of exchange rate changes into the domestic prices (inflation) of India. This paper will enrich the existing literature from a viewpoint of a comprehensive analysis of exchange rate pass-through by taking note of potential asymmetries coupled with other important determinants of inflation.

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“…This reasoning suggests linking the two literatures -on the monetary policy transmission and on exchange-rate pass-through -into a unified approach. Smets and Wouters (2002); Zorzi et al (2007); Ito and Sato (2008) provide insights into the inter-linkages between pass through and monetary policy. Smets and Wouters (2002) find that incomplete exchange rate pass-through for both import and domestic prices in the Euro zone reduce the effectiveness of the exchange rate channel of monetary policy.…”

Section: Introductionmentioning

confidence: 99%

“…Smets and Wouters (2002) find that incomplete exchange rate pass-through for both import and domestic prices in the Euro zone reduce the effectiveness of the exchange rate channel of monetary policy. On the other hand Zorzi et al (2007); Ito and Sato (2008) assess the magnitude of exchange rate passthrough in a set of emerging economies and East Asian counties assuming endogeneity between exchange rate and other monetary policy instruments. Taking into account the impact of interest rate shocks on the exchange rate, Zorzi et al (2007) find a larger pass-through for emerging markets in general compared to developed countries.…”

Section: Introductionmentioning

confidence: 99%

“…On the other hand Zorzi et al (2007); Ito and Sato (2008) assess the magnitude of exchange rate passthrough in a set of emerging economies and East Asian counties assuming endogeneity between exchange rate and other monetary policy instruments. Taking into account the impact of interest rate shocks on the exchange rate, Zorzi et al (2007) find a larger pass-through for emerging markets in general compared to developed countries. Ito and Sato (2008) find a larger passthrough to import prices compared to domestic prices in the crisis-hit East Asian countries.…”

Section: Introductionmentioning

confidence: 99%

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