Exchange rate pass-through in emerging countries

Abstract

This paper provides empirical evidence on exchange rate pass-through from East Asian and Latin American emerging market economies. Considering external constraints on monetary policy in emerging countries, we propose a VAR model to examine the exchange rate pass-through to domestic prices. We include a vector of exogenous foreign variables to control for international economic events. We estimate the degree of exchange rate pass-through to consumer prices. The empirical results suggest that the exchange rate pass-through is higher in Latin American countries than in the Asian countries. Monetary policy plays an important role in anchoring the inflationary expectations. The exchange rate pass-through is less in countries that have adopted explicit inflation targeting policy. When we estimate the degree of exchange rate pass-through during different sub-samples, we find that the exchange rate pass-through is declined and seems to be more consistent during the 2000s as compared to 1990s. The exchange rate pass-through has declined after the adoption of an explicit inflation targeting monetary policy.