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Title: International Evidence on Shock-Dependent Exchange Rate Pass-Through

Author(s): Kristin Forbes, Ida Hjortsoe and Tsvetelina Nenova

Publication Date: September 2020

Keyword(s): Currency wars, Exchange rate, inflation, monetary policy, Pass-Through and Price level

Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: 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.

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Bibliographic Reference

Forbes, K, Hjortsoe, I and Nenova, T. 2020. 'International Evidence on Shock-Dependent Exchange Rate Pass-Through'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15242