Working Paper: NBER ID: w28520
Authors: Sebastian Edwards; Luis Cabezas
Abstract: We use detailed data for Iceland to examine two often-neglected aspects of the “exchange rate pass-through” problem. First, we investigate whether the pass-through coefficient varies with the degree of “international tradability” of goods. Second, we analyze if the pass-through coefficient depends on the monetary policy framework. We consider 12 disaggregated price indexes in Iceland for 2003-2019, a period that includes Iceland’s banking and currency crisis of 2008. We find that the pass-through declined around the time Iceland reformed its “flexible inflation targeting,” and that the coefficients are significantly higher for tradable than for nontradable goods.
Keywords: exchange rate passthrough; monetary policy; real exchange rates; Iceland; 2008 crisis
JEL Codes: E31; E52; E58; F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tradability of goods (F10) | passthrough coefficients (C29) |
| change in monetary policy framework (E63) | passthrough coefficient (C29) |
| reform of flexible inflation targeting (E63) | passthrough coefficient (C29) |
| tradability of goods (F10) | passthrough into headline inflation (E31) |
| tradable goods (F19) | passthrough (Y60) |
| monetary policy reforms (E69) | structural break in passthrough coefficients (C22) |