International Evidence on Shock-Dependent Exchange Rate Pass-Through

49 Pages Posted: 12 Sep 2020

See all articles by Kristin J. Forbes

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Ida Hjortsoe

Bank of England

Tsvetelina Nenova

London Business School - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: September 2020

Abstract

We analyse the economic conditions (the "shocks") behind currency movements and show how that analysis can help address a range of questions, focusing on exchange rate pass-through to prices. We build on a methodology previously developed for the United Kingdom and adapt this framework so that it can be applied to a diverse sample of countries using widely available data. The paper provides three examples of how this enriched methodology can be used to provide insights on pass-through and other questions. First, it shows that exchange rate movements caused by monetary policy shocks consistently correspond to significantly higher pass-through than those caused by demand shocks in a cross-section of countries, confirming earlier results for the UK. Second, it shows that the underlying shocks (especially monetary policy shocks) are particularly important for understanding the time-series dimension of pass-through, while the standard structural variables highlighted in previous literature are most important for the cross-section dimension. Finally, the paper explores how the methodology can be used to shed light on the effects of monetary policy and the debate on "currency wars": it shows that the role of monetary policy shocks in driving the exchange rate has increased moderately since the global financial crisis in advanced economies.

Keywords: Currency wars, Exchange rate, inflation, monetary policy, Pass-Through, Price level

JEL Classification: E31, E37, E52, F47

Suggested Citation

Forbes, Kristin J. and Hjortsoe, Ida Maria and Nenova, Tsvetelina, International Evidence on Shock-Dependent Exchange Rate Pass-Through (September 2020). CEPR Discussion Paper No. DP15242, Available at SSRN: https://ssrn.com/abstract=3688196

Kristin J. Forbes (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Ida Maria Hjortsoe

Bank of England ( email )

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Tsvetelina Nenova

London Business School - Department of Economics ( email )

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