Exchange Rate Pass-Through in Emerging Markets

TLDR

This paper examines the degree of exchange‑rate pass‑through to prices in 12 emerging markets across Asia, Latin America, and Central and Eastern Europe. The study finds that ERPT into import and consumer prices is generally low in low‑inflation emerging markets, comparable to developed economies, that ERPT is positively related to inflation (excluding Argentina and Turkey), and that the link between import openness and ERPT is only weakly supported.

Abstract

This paper examines the degree of Exchange Rate Pass-Through (ERPT) to prices in 12 emerging markets in Asia, Latin America, and Central and Eastern Europe. Our results, based on three alternative vector autoregressive models, partly overturn the conventional wisdom that ERPT into both import and consumer prices is always higher in "emerging" than in "developed" countries. For emerging markets with only one digit inflation (most notably the Asian countries), passthrough to import and consumer prices is found to be low and not very dissimilar from the levels of developed economies. The paper also finds robust evidence for a positive relationship between the degree of the ERPT and inflation, in line with Taylor's hypothesis once two outlier countries (Argentina and Turkey) are excluded from the analysis. Finally, the presence of a positive link between import openness and ERPT, while plausible theoretically, finds only weak empirical support.