Exchange Rate Pass-Through to Inflation and Its Effect on Economic Growth in a Dollarized Economies: The Case of Southeast Asian Countries

This paper aims to investigate the impact of exchange rate pass-through in dollarized economies to domestic inflation and economic growth: evidence from Southeast Asian countries. The panel data for five selected countries (Cambodia, Indonesia, Lao PDR, the Philippines and Vietnam) over the period 2000-2015 is employed. The empirical results by using fixed effects estimation found that there is no direct impact of currency depreciation and dollarization degree to domestic inflation and economic growth. However, the result indicates the indirect impact of exchange rate passthrough in dollarized economies across selected countries. It reveals that the coefficient of interaction term variable between currency depreciation and dollarization degree is significant and correlated with domestic inflation and economic growth. For instance, the level of dollarization increases the exchange rate pass-through and it also suggests a positive and significant relationship to domestic inflation. Likewise, higher degree of dollarization also increases the exchange rate pass-through coefficient and it has a negative and significant correlation to economic growth. The regression analysis shows that there is quite large pass-though coefficient in highly dollarized economies across five selected countries. It estimates of 0.72 to 0.9 percent, which is consistent with the accepted view that there is the large passthrough coefficient in high dollarized economies.