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There is a huge literature about the effects of exchange rate changes on macroeconomic indicators, specifically on the trade balance, growth, inflation, and overall productivity level in open economies. One of the main attempts in the related studies is ascertaining whether the exchange rate fluctuations alter domestic prices. This possible mechanism is called as the passthrough effect which is getting more important since the argument that exchange rate adjustment is a part of the solution for global rebalancing has been empirically well-supported. Starting from this claim, this study purposes to explore whether there is an exchange rate pass-through effect in 19 high-income OECD countries over the period of 1990-2015. To this end, using a data set of i) consumer price index, ii) producer price index proxied by wholesale price index, iii) nominal effective exchange rate, and iv) industrial production proxied by the value-added share of industry sectors in gross domestic product, both structural vector autoregressive (VAR) and autoregressive distributed lag (ARDL) models are estimated following the unbalanced panel data analysis procedure. Results reveal that exchange rate pass-through effects on the domestic prices are significant but not that strong in both the short-run and the long-run. Moreover, in line with theoretical expectations, the passthrough effects tend to diminish over time. The study concludes with a suggestion that policy-makers need to consider policy actions accompanying the exchange rate changes to ensure domestic price stability which consequently interacts with many macroeconomic indicators.

Exchange Rate Pass-Through to Domestic Prices: Evidence from OECD Countries