Pass-Through of Exchange Rate into Domestic Prices: The Case of Four East-Asian Countries

The paper undertakes a comparative empirical analysis of the effects of shocks on domestic prices in four Asian countries before and after the financial crisis of 1997 in South-East Asia. We apply two different estimation methodologies, namely structural VAR and a single equation approach. The results of the two methods are consistent, although the magnitude of the elasticities of the exchange rate pass-through are different due to the inclusion of different variables, lag terms and different assumptions made in both methods. The results show that the degrees of exchange rate pass-through in these countries are different across countries and over time. In most cases, the pass-through rates are incomplete. The degree of exchange rate pass-through is highest on import prices, moderate on PPI and lowest on CPI. In some cases, the pass-through rates on CPI are even negative. The effect of the import price shock is stronger compared to that of the exchange rate shock in determining the movement of domestic prices in these countries. Trade openness has a weak correlation with the degree of exchange rate pass-through.