International Evidence on Shock-Dependent Exchange Rate Pass-Through / Kristin Forbes, Ida Hjortsoe, Tsvetelina Nenova.

Format:

Book

Author/Creator:

Forbes, Kristin.

Contributor:

National Bureau of Economic Research.

Hjortsoe, Ida.

Nenova, Tsvetelina.

Series:

Working Paper Series (National Bureau of Economic Research) no. w27746.

NBER working paper series no. w27746

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

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.

Notes:

Print version record

August 2020.