Exchange Rate Pass-Through: Experience from Selected OECD Countries

Abstract

The paper estimates the exchange rate pass-through for a set of OECD countries. It examines the effects of the inflation rate, inflation volatility, exchange rate volatility, and the degree of openness of an economy, on the degree of exchange rate pass-through. Different measures of price levels and volatilities are used to assess the robustness of the findings to these measures. Furthermore, the paper explores the argument that the exchange rate pass-through has declined over time for countries with a low and stable inflation environment. Evidence of a positive relationship between the inflation volatility and the exchange rate pass-through is also found. Finally, the paper concludes that the degree of exchange rate pass-through may be endogenous to an economy's monetary policy. Therefore, monetary authorities and policy makers may wish to consider taking the degree of pass-through into account when designing the optimal monetary policy or exchange rate regime.