Introduction to a Special Section on ‘Exchange Rate Pass-through in Developing and Emerging Markets’

Abstract

The interest in exchange rate pass-through (ERPT) in emerging market and developing economies has burgeoned in the last two decades. Small, open and trade-dependent economies embody special features that can make it difficult to obtain reliable estimates of ERPT. This Special Section includes a survey of recent research in developing and emerging market countries on ERPT, focusing on the monetary policy relevance of ERPT.

The frequent misspecifications that produce unreliable ERPT estimates are highlighted. Many empirical issues raised in the survey are illustrated by the macro- and the micro-economic empirical studies on South Africa (SA) included in this Special Section, and an earlier published JDS paper on ERPT in SA.

Acknowledgements

Janine Aron acknowledges support from the British Academy. This research was also supported in part by grants from the Open Society Foundation and the Oxford Martin School.

Notes

^1. For correcting trade imbalances, a high level of pass-through to import prices and to wholesale prices to induce expenditure switching is helpful, but a low subsequent pass-through to retail prices (for example, the CPI) is needed to contain inflation and promote competitiveness (Obstfeld, 2002).

^2. Pooling constrains pass-through to be equal across all goods (or services) in the respective estimations.

^3. One reason for this result could be the absence of controls for destination country unit labour costs, see Aron, MacDonald and Muellbauer (2014, Section 5).

^4. Another interpretation is that when China joined the World Trade Organisation in December 2001, tariffs and quotas were removed, leading to relative price declines for SA’s imports from China (but not other countries) just as the SA rand fell sharply. Zero pass-through may reflect the coincidence of this factor driving down China’s prices.