International Finance Discussion Papers (IFDP)
July 2001 (Revised September 2004)
Monetary Policy and Exchange Rate Pass-Through
Joseph E. Gagnon and Jane Ihrig
Abstract:
The pass-through of exchange rate changes into domestic inflation appears to have declined in many countries since the 1980s. We develop a theoretical model that attributes the change in the rate of pass-through to increased emphasis on inflation stabilization by many central banks. This hypothesis is tested on twenty industrial countries between 1971 and 2003. We find widespread evidence of a robust and statistically significant link between estimated rates of pass-through and inflation variability. We also find evidence that observed monetary policy behavior may be a factor in the declining rate of pass-through.
Original version (PDF)Keywords: Inflation targeting, Taylor rule
PDF: Full Paper
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