Exchange Rate Pass-Through in Developing and Emerging Markets: A Survey of Conceptual, Methodological and Policy Issues, and Selected Empirical Findings

Abstract

Global integration has increased the international linkages of financial markets for emerging market countries. A key channel for the international transmission of inflation and economic cycles is from exchange rate movements to domestic prices, known as exchange rate pass-through (ERPT). This article reviews the conceptual, methodological and policy issues connected with ERPT in emerging market and developing countries, and critically surveys selected empirical studies. A key contribution is to categorise and compare the heterogeneous methodologies used to extract ERPT measures in the empirical literature. Single equation models and systems methods are contrasted; frequent misspecifications that produce unreliable ERPT estimates are highlighted. The discerning policy-maker needs to ascertain by which methods ERPT measures were calculated, the controls and restrictions applied, and the time frame and stability of the estimates.