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Open Economies Review

, Volume 23, Issue 2, pp 359–380 | Cite as

Exchange Rate Pass-Through: Evidence Based on Vector Autoregression with Sign Restrictions

  • Lian AnEmail author
  • Jian Wang
RESEARCH ARTICLE

Abstract

We estimate exchange rate pass-through (PT) into import, producer and consumer price indexes for nine OECD countries, using a method proposed by Uhlig (2005). In a Vector Autoregression (VAR) model, we identify the exchange rate shock by imposing restrictions on the signs of impulse responses for a small subset of variables. These restrictions are consistent with a large class of theoretical models and previous empirical findings. We find that exchange rate PT is less than one at both short and long horizons. Among three price indexes, exchange rate PT is greatest for import price index and smallest for consumer price index. In addition, greater exchange rate PT is found in an economy which has a smaller size, higher import share, more persistent exchange rate, more volatile monetary policy, higher inflation rate, and less volatile aggregate demand.

Keywords

Exchange rate pass-through Vector autoregression Sign restrictions 

JEL Classification

F31 F41 

Notes

All views are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal Reserve System. We thank Editor George Tavlas and an anonymous referee for many constructive comments and suggestions. We would also like to thank participants at various seminars and conferences for comments and Janet Koech for excellent research assistance.

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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.Department of Economics and Geography, Coggin College of BusinessUniversity of North FloridaJacksonvilleUSA
  2. 2.Research DepartmentFederal Reserve Bank of DallasDallasUSA

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