Monetary Policies, Exchange Rate Pass-through and Prices in Asian Economies: A Long and Short-run Analysis

Author

Department of Economics, Faculty of Economics and Political Sciences, Shahid Beheshti University

Abstract

Abstract





T





he financial crisis in 2007-2008 has turned into the most far-reaching international financial and economic crisis since the Great Depression. Indeed, the crisis-affected Asian countries experienced varying degrees of changes in the exchange rate and prices following an initial shock of sharp depreciation of their currencies in the second half of 1997. Moreover, questions connected with the exchange rate regime have been an important part of understanding macroeconomic policies and outcomes in Asia. Thus, the objective of this paper is to examine pass-through effects on domestic prices among the four selected Asian countries, Japan and S. Korea from the east and Iran and Turkey from the west, with special emphasis on an interaction between prices, monetary policies and exchange rate changes. In order to take into account dynamic effects between these variables, the structural vector auto-regression (SVAR) method is employed, by which the responses of such shocked variables are evaluated during 1970- 2015. The empirical results confirmed a dynamic relationship between exchange rate pass-through and other macro variables in the selected countries. Also, the results have shown that the pass-through shocks in the short-run are more effective in the countries which benefit from a managed floating exchange rate regime and inflation targeting policy.
 

Keywords

References

An, L. (2006). Exchange Rate Pass-through: Evidence Based on Vector Auto-regression with Sign Restrictions. Munich Personal REPEC Archive, Retrieved from https://ideas.repec.org/p/fip/feddgw/70.html.
Baig, T., & Goldfajn, I. (1999). Financial Market Contagion in the Asian Crises. IMF Staff Papers, 46(2), 167-195.
Ball, L. (1999). Policy Rules for Open Economies. In J. Taylor (Ed.), Monetary Policy Rules. Chicago: University of Chicago Press.
Batini, N., Harrision, R., & Millard, S. P. (2001). Monetary Policy Rules for an Open Economy. Journal of Economic Dynamics and Control, 27(11-12), 2059-2094.
Borensztein, E., & De Gregorio, J. (1999). Devaluation and Inflation after Currency Crises. International Monetary Fund, Retrieved from
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.202.925&rep=rep1&type=pdf
Burstein, A., & Gopinath, G. (2014). International Prices and Exchange Rates. Handbook of International Economics, 4, 391-451.
Calvo, G. A. (1999). Fixed versus Flexible Exchange Rates: Preliminaries of a Turn-of-Millennium Rematch. Economic Research Work, Retrieved from http://hdl.handle.net/1903/4295
Calvo, G. A., & Reinhart, C. M.  (2002). Fear of Floating. Quarterly Journal of Economics, CXVII(2), 379-408.
Campa, J. M., & Goldberg, L. S.  (2005). Exchange Rate Pass Through into Import Prices. Review of Economics and Statistics, 87(4), 679-690.
Campa, J. M., Goldberg, L. S., & González-Mínguez, J. M. (2005). Exchange Rate Pass-Through to Import Prices in Euro Area. NBER Working Paper, 11632, Retrieved from http://www.nber.org/papers/w11632.pdf.
Caselli, F., & Roitman, A. (2016). Non-Linear Exchange Rate Pass-Through in Emerging Markets. International Monetary Fund, Working Paper, Retrieved from https://www.imf.org/external/pubs/ft/wp/2016/wp1601.pdf.
Claessens, S., Dell’Ariccia, G., Igan, D., & Laeven, L. (2010). Lessons and Policy Implications from the Global Financial Crisis. IMF Working Paper, 10/44, Retrieved from
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.620.1418&rep=rep1&type=pdf
Cologni, A., & Manera, M. (2008). Oil Prices, Inflation and Interest Rates in a Structural Co-integrated VAR Model for the G-7 Countries. Journal of Energy Economics, 30, 856-888.
Devereux, B. M. (1999). Monetary Policy, Exchange Rate Flexibility, and Exchange Rate Pass-Through. Central Bank of Mexico, Retrieved from
https://pdfs.semanticscholar.org/ed31/19b890265cbc99e567e2c3632cee00d7b5c4.pdf
Dooley, M., & Hutchison, M. (2009). Transmission of the U.S. Subprime Crisis to Emerging Markets: Evidence on the Decoupling-Recoupling Hypothesis. Journal of International Money and Finance, 28, 1331-1349.
Dornbusch, R. (1987). Exchange Rates and Prices. American Economic Review, 77, 93-106.
Eichengreen, B., & Rose, A. (1998). Staying Afloat When the Wind Shifts: External Factors and Emerging Market Banking Crises. NBER Working Paper, 6370, Retrieved from
http://cepr.org/active/publications/discussion_papers/dp.php?dpno=1828.
Faruqee, H. (2006). Exchange Rate Pass-Through in the Euro Area. IMF Staff Papers, 53(1), 63-88.
Feenstra, R. C. (1989). Symmetric Pass-Through of Tariffs and Exchange Rates under Imperfect Competition: An Empirical Test. Journal of International Economics, 27(1-2), 25-45.
Forbes, K., Hjortsoe, I., & Nenova, T. (2015). The Shocks Matter: Improving our estimates of Exchange Rate Pass-Through. External MPC Discussion Paper, Retrieved from https://ideas.repec.org/p/mpc/wpaper/0043.html.
Fraga, A., Goldfajn, I., & Minella, A. (2003). Inflation Targeting in Emerging Market Economies. NBER Working Paper, Retrieved from http://www.nber.org/papers/w10019.
Frömmel, M., & Schobert, F. (2006). Monetary Policy Rules in Central and Eastern Europe. Discussion Paper, Retrieved from
http://diskussionspapiere.wiwi.uni-hannover.de/pdf_bib/dp-341.pdf.
Gagnon, J. E., & Ihrig, J. (2004). Monetary Policy and Exchange Rate Pass-through. Board of Governors of Federal Reserve System, Retrieved from
https://www.federalreserve.gov/pubs/ifdp/2001/704/ifdp704r.pdf
Ganev, G., Molnar, K., Rybinski, K., & Wozniak, P. (2002). Transmission Mechanisms of Monetary Policy in Central and Eastern Europe. Central for Social and Economic Research, Case Reports, Retrieved from https://www.cerge-ei.cz/pdf/gdn/rrc/RRCI_09_paper_01.pdf.
Goldberg, P., & Knetter, M. (1997). Goods Prices and Exchange Rate: What Have We Learned? Journal of Economic Literature, 35, 1243-72.
Goldfajan, I., & Werlang, S. R. C.  (2000). The Pass-Through from Depreciation to Inflation: A Panel Study. Working Paper, Retrieved from https://econpapers.repec.org/paper/riotexdis/423.htm.
Gosh, A. R., & Wolf, H. (2001). Imperfect Exchange Rate Pass-Through: Strategic Pricing and Menu Costs. CESifo Working Paper, Retrieved from https://www.econstor.eu/bitstream/10419/75783/1/cesifo_wp436.pdf.
Gopinath, G. (2015). The International Price System. National Bureau of Economic Research Working Paper, Retrieved from
https://ideas.repec.org/p/nbr/nberwo/21646.html.
Hahn, E. (2003). Pass-Through of External Shocks to Euro Area Inflation. ECB Working Paper, Retrieved from
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp243.pdf?c6044208c4776b265f7c0ad5038de7e7.
Hernandez, L., & Montiel, P. (2001). Post-Crisis Exchange Rate Policy in Five Asian Countries: Filling in the Hollow Middle? IMF, Retrieved from
https://www.imf.org/external/pubs/ft/wp/2001/wp01170.pdf.
Horváth, B., & Maino, R. (2006). Monetary Transmission Mechanisms in Belarus. IMF Working Paper, Retrieved from
https://www.imf.org/external/pubs/ft/wp/2011/wp1187.pdf .
Ito, T., & Sato, K. (2007). Exchange Rate Changes and Inflation in Post-Crisis Asian Economies: VAR Analysis of the Exchange Rate Pass-Through. JMCB, Retrieved from https://ideas.repec.org/p/nbr/nberwo/12395.html.
Jasová, M., Moessner, R., & Takáts, E. (2016). Exchange Rate Pass-Through: What Has Changed since the Crisis? BIS Working Paper, Retrieved from https://www.bis.org/publ/work583.pdf.
Krugman, P. (1987). Pricing to Market When the Exchange Rate Changes. In S. Arndt, & J. Richardson (Eds.). Real-Financial Linkages among Open Economies. Cambridge: MIT Press.
Lane, P., & Milesi-Ferretti, G. (2004). Financial Globalization and Exchange Rates. Centre for Economic Policy Research, Retrieved from
https://www.imf.org/external/np/res/seminars/2004/60/pdf/ferret.pdf.
McCarthy, J. (2000). Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies. Staff Reports, Retrieved from https://ideas.repec.org/p/fip/fednsr/111.html.
Menon, J. (1995). Exchange Rate Pass-Through. Journal of Economic Surveys, 9(2), 197-231.
Minella, A., Springer de Freitas, P., Goldfajn, I. & Muinhos, M. K. (2003). Inflation Targeting in Brazil, Constructing Credibility under Exchange Rate Volatility. Journal of International Money and Finance, 22, 1015-1040.
Mishkin, F. S. (2000). Inflation Targeting in Emerging Market Countries. NBER Working Paper Series, Retrieved from
https://econpapers.repec.org/paper/nbrnberwo/7618.htm.
Mohanty, M. S., & Klau, M. (2004). Monetary Policy Rules in Emerging Market Economies: Issues and Evidence. BIS Working Papers, Retrieved from https://www.bis.org/publ/work149.pdf.
Nogueira Junior, R. P. (2007). Inflation Targeting and the Role of Exchange Rate Pass-through. University of Kent, Discussion Paper, Retrieved from ftp://ftp.repec.org/opt/ReDIF/RePEc/ukc/ukcedp/0602.pdf.
Olivei, G. P. (2002). Exchange Rates and the Prices of Manufacturing Products Imported into the United States. New England Economic Review, 1, 3-18.
Osawa, N. (2006). Monetary Policy Responses to the Exchange Rate: Empirical Evidence from three East Asian Inflation-targeting Countries. Bank of Japan Working Paper Series, Retrieved from
https://www.boj.or.jp/en/research/wps_rev/wps_2006/data/wp06e14.pdf.
Otani, A., Shiratsuka, S., &. Shirota, T. (2005). Revisiting the Decline in the Exchange Rate Pass-Through: Further Evidence from Japan’s Import Prices. IMES Discussion Paper, Retrieved from
https://econpapers.repec.org/article/imeimemes/v_3a24_3ay_3a2006_3ai_3a1_3ap_3a61-75.htm.
Sahminan, S. (2002). Exchange Rate Pass-through into Import Prices: Empirical Evidences from Some Southeast Asian countries. The University of North Carolina at Chapel Hill, Working Paper, Retrieved from www.ibrarian.net/.../Exchange_Rate_Pass_Through_into_Import_Prices__Em.pdf?
Schmidt-Hebbel, K., & Werner, A. (2002). Inflation Targeting in Brazil, Chile and Mexico: Performance, Credibility and the Exchange Rate. Economia, 2(2), 31-89.
Senay, O. (2001). The Role of the Exchange Rate in Monetary Policy Rules. York: University of York.
Taylor, J. B. (2001). The Role of the Exchange Rate in Monetary Policy Rules. American Economic Review, 91(2), 263-267.
---------- (2000). Low Inflation, Pass-through and the Pricing Power of Firms. European Economic Review, 44(7), 1389-1408.
Iranian Economic Review
Volume 22, Issue 4
October 2018
Pages 1034-1064

Files

Share

How to cite

Statistics