Working Paper: NBER ID: w12395
Authors: Takatoshi Ito; Kiyotaka Sato
Abstract: Macroeconomic consequences of a large currency depreciation among the crisis-hit Asian economies had varied from one country to another. Inflation did not soar in most Asian countries, including Thailand and Korea, after the exchange rate depreciated during the crisis. Indonesia, however, suffered very high inflation following a very large nominal depreciation of the rupiah. As a result, price competitive advantage by the rupiah depreciation was lost in the real exchange rate terms. The objective of this paper is to examine the pass-through effects of exchange rate changes on the domestic prices in the East Asian economies using a VAR analysis. Main results are as follows: (1) the degree of exchange rate pass-through to import prices was quite high in the crisis-hit economies; (2) the pass-through to CPI was generally low, with a notable exception of Indonesia: and (3) in Indonesia, both the impulse response of monetary policy variables to exchange rate shocks and that of CPI to monetary policy shocks are positive, large, and statistically significant. Thus, Indonesia's accommodative monetary policy, coupled with the high degree of the CPI responsiveness to exchange rate changes was an important factor in the spiraling effects of domestic price inflation and sharp nominal exchange rate depreciation in the post-crisis period.
Keywords: exchange rate; inflation; VAR analysis; Asian economies; passthrough effects
JEL Codes: F12; F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate changes (F31) | import prices (P22) |
| exchange rate changes (F31) | Consumer Price Index (CPI) (E31) |
| monetary policy shocks (E39) | Consumer Price Index (CPI) (E31) |
| exchange rate changes (F31) | Consumer Price Index (CPI) (in Indonesia) (C43) |
| monetary policy variables (E52) | exchange rate shocks (F31) |
| exchange rate changes (F31) | domestic price inflation (E31) |