Exchange Rate Pass-Through to Domestic Prices : Does the Inflationary Environment Matter?

The paper tests a hypothesis suggested by Taylor (2000) that a low inflationary environment leads to a low exchange rate pass-through to domestic prices. To test this hypothesis, the paper derives a pass-through relation based on new open economy macroeconomic models. A large database that includes 1979-2000 data for 71 countries is used to estimate this relation. There is strong evidence of a positive and significant association between the pass-through and the average inflation rate across countries and periods. The inflation rate, moreover, dominates other macroeconomic variables in explaining cross-regime differences in the pass-through.
Publication date: December 2001
ISBN: 9781451859867
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Inflation , Inflation , Pass-through , exchange rate , inflation rate , average inflation , average inflation rate , Open Economy Macroeconomics

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