Pass-Through of Exchange Rates and Import Prices to Domestic In‡ation in Some Industrialized Economies¤

This paper examines the impact of exchange rates and import prices on domestic PPI and CPI in selected industrialized economies. The empirical model is a VAR incorporating a distribution chain of pricing. Impulse responses and variance decompositions indicate that these external factors have a modest e¤ect on domestic price in‡ation over the post-Bretton Woods era. The pass-through is somewhat stronger in countries with a larger import share. A historical decomposition over 1996-98 indicates, however, that external factors have had a sizable disin‡ationary e¤ect in most of the countries during these past couple years. Estimating the model using post-1982 data has little e¤ect on these conclusions. ¤I would like to thank Palle Andersen, Evan Koenig, Deborah Lindner, Rob Rich, Bill Wascher, and Kei-Mu Yi as well as participants of the New York Fed Domestic Department and International Department brown bag seminars and the Federal Reserve System Macroeconomics committee meeting for their comments and Rema Hanna for excellent research assistance. I remain responsible for all remaining errors and omissions. Much of the work on this paper was done while I was visiting economist at the Bank for International Settlements, whose hospitality is greatly appreciated. Please address correspondence to Jonathan McCarthy, Domestic Research Department, Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045, e-mail: [email protected]. The opinions expressed in this paper are mine and do not re‡ect o¢cial views of the Bank for International Settlements, the Federal Reserve Bank of New York, nor the Federal Reserve System.