Monetary Policy and Exchange Rate Pass-through

By Joseph E. Gagnon, J. Ihrig. 2004

611 citations recorded by the source corpus.

Recent research suggests that the pass-through of exchange rate changes into domestic inflation has declined in many countries since the 1980s. We develop a theoretical model that attributes the change in pass-through (defined as the correlation of inflation with exchange rate changes) to increased emphasis on inflation stabilization by many central banks. This hypothesis is tested on eleven industrial countries between 1971 and 2000. We find widespread evidence of both a decline in pass-through and a decline in the variability of inflation in the 1990s. We also find a statistically significant link between measured pass-through and inflation variability. However, our efforts to correlate the decline in pass-through with estimated changes in monetary policy behavior are inconclusive due to poor estimates of policy behavior.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/e5a9b5e8dc60da161269f30618a58bf6348078a9

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Citations in the corpus

A new look at pass-through (2008, background): “Gagnon and Ihrig (2002) find support for this hypothesis when they look at passthrough into consumer prices.”
Exchange-Rate Pass-Through in the G-7 Countries (2006, positive): “Gagnon and Ihrig (2004) provide a model that links pass-through to monetary policy conditions; empirically they find that countries with credible and anti-inflationary monetary policies tend to experience lower consumer-price pass-through.”
Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation (2004, neutral): “The one exception is a study by Gagnon and Ihrig (2002).”
Exchange rates and the prices of manufacturing products imported into the United States (2002, background): “McCarthy (2000) and Gagnon and Ihrig (2001) provide evidence that exchangerate fluctuations during the 1990s exerted a smaller role on consumer price inflation in several industrialized countries.”
The Relationship Between Exchange Rates and Inflation Targeting Revisited (2006, methodology): “In the basic results reported in table 2, I follow Gagnon and Ihrig (2004) and do not include the additional controls, x. See, however, the discussion below.”
Exchange Rate Pass-Through in Emerging Markets (2007, positive): “Another line of reasoning stresses more the role that monetary and fiscal authorities play, by partly offsetting the impact of changes in the exchange rate on prices (Gagnon and Ihrig, 2004).”
Non-Linear Exchange Rate Pass-Through in Emerging Markets (2016, background): “Gagnon and Ihrig (2004) test the same hypothesis on 20 industrial countries between 1971 and 2003, and find a decline in pass-through related to adoption of IT.”
Living with Flexible Exchange Rates: Issues and Recent Experience in Inflation Targeting Emerging Market Economies (2003, neutral): “For example, Gagnon and Ihrig (2001) report this result for industrial countries.”