Pass-through of exchange rates and import prices to domestic inflation in some industrialised economies

by J. McCarthy

Working Papers No 79
November 1999

This paper examines the impact of exchange rates and import prices on domestic PPI and CPI in selected industrialised economies. The empirical model is a VAR incorporating a distribution chain of pricing. Impulse responses and variance decompositions indicate that these external factors have a modest effect on domestic price inflation over the post-Bretton Woods era. The pass-through is somewhat stronger in countries with a larger import share. A historical decomposition over 1996-98 indicates, however, that external factors have had a sizable disinflationary effect in most of the countries during the past couple of years. Estimating the model using post-1982 data has little effect on these conclusions.