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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Monetary Policy and Exchange Rate Pass-Through
Joseph E. Gagnon; Jane Ihrig
2001-704  (July 2001, latest version September 2004)

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.

Full paper, latest version (149 KB PDF)
Original version (163 KB PDF)

Inflation targeting, Taylor rule

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