The 53 reference contexts in paper Jeannine Bailliu, Eiji Fujii (2004) “Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation” / RePEc:bca:bocawp:04-21

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    It resulted in an environment in which inflation is lower and more stable.2 This low-inflation period in industrialized countries has also coincided with several episodes in which countries have experienced large exchange rate depreciations, which, based on historical experience, had much smaller effects on consumer prices than anticipated. For example,
    Exact
    Cunningham and Haldane (1999)
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    examine the experiences of three such countries—the United Kingdom (1992), Sweden (1992), and Brazil (1999)—using an event-study approach. Their study suggests that the pass-through of exchange rate changes to consumer prices in these cases occurred with a lag of several quarters and was incomplete (i.e., less than an amount proportional to the share of imported goods in the consumption basket).
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    smaller than expected.3 This common experience has led to the belief, shared by central bankers in many industrialized countries, that the extent of exchange rate pass-through (ERPT) into consumer prices has declined. Furthermore, the fact that this potential decline has coincided with a transition to a lowinflation environment has popularized the view that these two phenomena could be linked.
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    Taylor (2000)
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    was one of the first to formally articulate this view and put forth the hypothesis that the 1.Other possible factors include favourable shocks, structural change, and increased international competition. 2.
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    Taylor (2000) was one of the first to formally articulate this view and put forth the hypothesis that the 1.Other possible factors include favourable shocks, structural change, and increased international competition. 2.See
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    Longworth (2002)
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    for a review of how Canadian monetary policy was able to deliver lower and more stable inflation in the 1990s compared with the previous decade. 3.Laflèche (1996) finds that special factors—such as the restructuring of the retail market, the abolition of customs duties on trade between Canada and the United States, and weakness in the aggregate economy—played an important role in explaining this o
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    She also suggests that the adoption of inflation targeting in 1991, and the resulting move to a low-inflation environment, may have been a contributing factor. This view is also supported by econometric evidence. Indeed, both Fillion and Léonard (1997) and
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    Kichian (2001)
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    found evidence that, compared to previous decades, the exchange rate pass-through (ERPT) coefficient in a Phillips curve model for Canada fell in the 1990s. low-inflation environment in many industrialized countries, which was brought about by more credible monetary policies, has successfully reduced the degree of ERPT to domestic prices.
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    Allowing for the possibility of multiple shifts in the inflation environment seems appropriate in this context, given that many industrialized countries 4.These studies are reviewed in section 2. 5.The one exception is a study by
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    Gagnon and Ihrig (2002).
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    In addition to using a cross-sectional approach, they test whether pass-through declined in each country in their sample following a change in the inflation regime. Our study differs from theirs in that we pay particular attention to the identification of changes in the inflation environment by formally testing for structural breaks in the inflation series in our sample countries, using a test dev
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    Our study differs from theirs in that we pay particular attention to the identification of changes in the inflation environment by formally testing for structural breaks in the inflation series in our sample countries, using a test developed by
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    Bai and Perron (1998)
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    that allows for the identification of multiple breaks. We then ensure that these breaks correspond with a change in the monetary policy regime. experienced two inflation stabilization periods in the post-Bretton Woods era, both of which were achieved by significant shifts in monetary policy.6 Using annual data for 11 industrialized countries from 1977 to 2001, we find evidence to support the hypot
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    More recently, pass-through has been examined from a macroeconomic perspective, drawing both on the common finding from the microeconomics literature that ERPT tends to be incomplete and on new developments in the open-economy macroeconomics literature. In the NOEM literature, based mainly on work by
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    Obstfeld and Rogoff (1995),
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    nominal rigidities and market imperfections are introduced into a dynamic general-equilibrium (DGE), open-economy model with well-specified microfoundations. Although PPP holds and pass-through is complete in the framework originally presented by Obstfeld and Rogoff, Betts and Devereux (1996, 2000) extended this model to allow for pricing to market, and therefore incomplete pass-through.
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    In the NOEM literature, based mainly on work by Obstfeld and Rogoff (1995), nominal rigidities and market imperfections are introduced into a dynamic general-equilibrium (DGE), open-economy model with well-specified microfoundations. Although PPP holds and pass-through is complete in the framework originally presented by Obstfeld and Rogoff,
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    Betts and Devereux (1996, 2000)
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    extended this model to allow for pricing to market, and therefore incomplete pass-through. In this type of framework, ERPT will depend on different pricing strategies, such as whether the firm practises producer currency pricing (PCP) or local currency pricing (LCP).
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    -through is complete in the framework originally presented by Obstfeld and Rogoff, Betts and Devereux (1996, 2000) extended this model to allow for pricing to market, and therefore incomplete pass-through. In this type of framework, ERPT will depend on different pricing strategies, such as whether the firm practises producer currency pricing (PCP) or local currency pricing (LCP). As discussed by
    Exact
    Betts and Devereux (1996) and Engel (2002),
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    if prices are preset in the currency of the producer, then the home-country price of the foreign good will move one-for-one with changes in the nominal exchange rate; thus there is full pass-through. Consequently, exchange rate movements will lead to a change in the relative price of the goods, and this will lead to a change in consumers’ demand for home, relative to foreign, goods.
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    On the other hand, if a firm practises LCP, then prices are preset in the local currency, and changes in the nominal exchange rate will have no short-run effect on prices faced by consumers. Thus, there is no pass-through in the short run. 7.
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    Goldberg and Knetter (1997)
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    provide a comprehensive review of this literature. 8.For example, see Kreinin (1997) and Hooper and Mann (1989). 9.For example, see Marston (1990) and Krugman (1987). If the economy is best characterized by a combination of firms, some of which practise LCP and some of which follow PCP, then the aggregate degree of pass-through will be partial in the short run.
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    On the other hand, if a firm practises LCP, then prices are preset in the local currency, and changes in the nominal exchange rate will have no short-run effect on prices faced by consumers. Thus, there is no pass-through in the short run. 7.Goldberg and Knetter (1997) provide a comprehensive review of this literature. 8.For example, see
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    Kreinin (1997) and Hooper and Mann (1989).
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    9.For example, see Marston (1990) and Krugman (1987). If the economy is best characterized by a combination of firms, some of which practise LCP and some of which follow PCP, then the aggregate degree of pass-through will be partial in the short run.
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    Thus, there is no pass-through in the short run. 7.Goldberg and Knetter (1997) provide a comprehensive review of this literature. 8.For example, see Kreinin (1997) and Hooper and Mann (1989). 9.For example, see
    Exact
    Marston (1990) and Krugman (1987).
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    If the economy is best characterized by a combination of firms, some of which practise LCP and some of which follow PCP, then the aggregate degree of pass-through will be partial in the short run. This is consistent with evidence that suggests that the ERPT varies by industry.10 The assumption that firms in the economy may follow different pricing strategies has also been advanced as an explanatio
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    firms—who assemble the imported goods and sell final goods to consumers—prefer to price in the local currency (because they face significant competition from other domestic final goods producers). The NOEM literature has also examined the extent to which ERPT can depend on a country’s inflation performance or monetary policy. As discussed earlier, this work is based on an idea put forth by
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    Taylor (2000),
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    who argued that a shift to a low-inflation environment causes a decline in the expected persistence of cost and price changes, which in turn results in a decline in ERPT. More specifically, several recent papers have developed NOEM-DGE models highlighting the link between pass-through and monetary policy.
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    Emphasizing channels such as a decline in the expected persistence of cost and price changes, a fall in the frequency of price changes, or an increase in the prevalence of LCP, these studies show that a transition to a low-inflation environment—that comes about as a result of a more credible/stable monetary policy—can lead to a lower degree of ERPT.
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    Choudhri and Hakura (2001)
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    emphasize a channel similar to the one in Taylor (2000) in the context of a DGE model with imperfect competition and staggered contracts. In their model, a low-inflation regime reduces ERPT because the pass-through reflects the expected effect of monetary shocks on current and future costs, which, in turn, are reduced by having a low-inflation regime.
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    as a decline in the expected persistence of cost and price changes, a fall in the frequency of price changes, or an increase in the prevalence of LCP, these studies show that a transition to a low-inflation environment—that comes about as a result of a more credible/stable monetary policy—can lead to a lower degree of ERPT. Choudhri and Hakura (2001) emphasize a channel similar to the one in
    Exact
    Taylor (2000)
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    in the context of a DGE model with imperfect competition and staggered contracts. In their model, a low-inflation regime reduces ERPT because the pass-through reflects the expected effect of monetary shocks on current and future costs, which, in turn, are reduced by having a low-inflation regime.
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    In their model, a low-inflation regime reduces ERPT because the pass-through reflects the expected effect of monetary shocks on current and future costs, which, in turn, are reduced by having a low-inflation regime.
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    Devereux and Yetman (2002)
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    also explore the link between ERPT and monetary policy in the context of a DGE framework. In their model, pass-through is determined by the frequency of price changes of importing firms, and this frequency is a function of the monetary policy regime.
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    If prices are sticky in the currency of the exporter, and thus there is a predominance of PCP in the economy, then ERPT will tend to be high. On the other hand, if goods prices are preset in the consumer’s currency (consistent with 10.See, for example,
    Exact
    Campa and Goldberg (2002).
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    LCP), then ERPT will tend to be low. Pass-through is linked to monetary policy in that countries with relatively stable monetary policies are assumed to have a prevalence of LCP in the economy. The relationship between ERPT and the inflation environment has also been examined empirically in a handful of studies.
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    Pass-through is linked to monetary policy in that countries with relatively stable monetary policies are assumed to have a prevalence of LCP in the economy. The relationship between ERPT and the inflation environment has also been examined empirically in a handful of studies. In addition to their theoretical contribution, noted above,
    Exact
    Choudhri and Hakura (2001) and Devereux and Yetman (2002)
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    also investigate the role of inflation variables in accounting for cross-country differences in ERPT in a large sample of countries. Their approach involves estimating a first-stage regression for each country in their sample to obtain an estimate of the average pass-through elasticity over a certain time period (usually 25 or 30 years).
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    shed light on what might explain crosscountry variations in pass-through elasticities, they cannot address the question of whether ERPT has declined in response to achange in the inflation environment. A purely cross-sectional analysis cannot tackle this question, given that it uses country-specific measures of pass-through that are averaged over the sample period, and are hence held constant.
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    Gagnon and Ihrig (2002)
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    address this issue in their study of the link between consumer prices and monetary policy in a sample of 20 industrialized countries over the period from 1971 to 2000. Indeed, in addition to using a cross-sectional approach, as do Choudhri and Hakura (2001) and Devereux and Yetman (2002), they also test whether pass-through declined in each country in the sample following a change in the inflation
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    Gagnon and Ihrig (2002) address this issue in their study of the link between consumer prices and monetary policy in a sample of 20 industrialized countries over the period from 1971 to 2000. Indeed, in addition to using a cross-sectional approach, as do
    Exact
    Choudhri and Hakura (2001) and Devereux and Yetman (2002),
    Suffix
    they also test whether pass-through declined in each country in the sample following a change in the inflation regime.12 One regime change was identified for each 11.Campa and Goldberg (2002) use a similar approach in their study of pass-through in Organisation of Economic and Co-operation Development (OECD) countries, although they focus on import rather than on consumer prices.
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    Indeed, in addition to using a cross-sectional approach, as do Choudhri and Hakura (2001) and Devereux and Yetman (2002), they also test whether pass-through declined in each country in the sample following a change in the inflation regime.12 One regime change was identified for each 11.
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    Campa and Goldberg (2002)
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    use a similar approach in their study of pass-through in Organisation of Economic and Co-operation Development (OECD) countries, although they focus on import rather than on consumer prices. Although they also find a positive association between inflation and ERPT, they conclude that microeconomic factors related to the composition of imports are relatively more important in explaining cross-count
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    Although they also find a positive association between inflation and ERPT, they conclude that microeconomic factors related to the composition of imports are relatively more important in explaining cross-country differences in pass-through to import prices. 12.In their cross-sectional analysis,
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    Gagnon and Ihrig (2002)
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    also find a systematic relationship between estimated rates of pass-through and inflation. They also examine the link between the pass-through coefficients and parameters estimated from Taylor-type monetary policy rules, but fail to find a robust relationship. country using a combination of casual inspection of the data and judgment.13 For each sample country, pass-through equations were then esti
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    Indeed, the traditional definition of ERPT is the percentage change in the local currency price of an imported good resulting from a 1 per cent change in the nominal exchange rate between the exporting and importing countries. This definition has now been expanded to include other types of prices, notably consumer prices. 15.See, for instance,
    Exact
    Dornbusch (1987), Knetter (1989), and Marston (1990).
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    q ,(2) psCqμ= Cqμ μηη1–()⁄≡η where is the marginal cost and is the markup of price over marginal cost. The markup is further defined as, where is the price elasticity of demand for the good.16 The expression for the price level in equation (2) emphasizes that the local currency price of the good can vary as a result of a change in the exchange rate, a change in the firm’s marginal cost, and/or a c
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    Consequently, a simple log-linear, reduced-form equation may be expressed as follows: ,(3) ptαλstτwtηytεt++ + += where and are measures of the exporter’s marginal cost and the importing country’s wtyt λ demand conditions, respectively. The coefficient thus measures ERPT. As discussed in
    Exact
    Goldberg and Knetter (1997),
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    variants of equation (3) are widely used as empirical specifications in the pass-through literature. In adapting this specification to be suitable for estimating ERPT at the aggregate level for all three price indexes, there are several issues that need to be considered.
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    are often found to be best described as I(1) series, it is common to use a specification with these two variables in first-difference form when estimating an aggregate pass-through equation—thus one ends up estimating an inflation equation. Second, the literature on inflation dynamics has emphasized the need to account for the observed inertial behaviour of inflation. However, as pointed out by
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    Galí and Gertler (1999),
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    it has been difficult for theoretical models to capture this persistence in inflation without appealing either to some form of ad hoc stickiness in inflation or to adaptive expectations. The authors appeal to the 16.
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    However, as a result of the fact that the lagged dependent variable is correlated with the disturbance term, the problem is that these estimators (when applied to dynamic models) are biased in finite samples. Indeed, as shown by
    Exact
    Nickell (1981),
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    the standard estimators for a dynamic panel-data model with fixed effects generates estimates that are biased when the time dimension of the panel is small.23 To address this issue, we use a dynamic GMM panel-data estimation developed by Arellano and Bond (1991) based on work by Anderson and Hsiao (1981) and Holtz-Eakin, Newey, and Rosen (1988).
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    Indeed, as shown by Nickell (1981), the standard estimators for a dynamic panel-data model with fixed effects generates estimates that are biased when the time dimension of the panel is small.23 To address this issue, we use a dynamic GMM panel-data estimation developed by
    Exact
    Arellano and Bond (1991)
    Suffix
    based on work by Anderson and Hsiao (1981) and Holtz-Eakin, Newey, and Rosen (1988). Their approach involves taking the first difference of equation (5) to remove the individual effects, as follows: .(6) xit,αi εit, yit,yit1–,–φyit1–,yit2–,–()xit,xit1–,–()'βεit,εit1–,–()++= Although the model in first differences is still characterized by a correlation between the lagged dependent variable and the
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    Indeed, as shown by Nickell (1981), the standard estimators for a dynamic panel-data model with fixed effects generates estimates that are biased when the time dimension of the panel is small.23 To address this issue, we use a dynamic GMM panel-data estimation developed by Arellano and Bond (1991) based on work by
    Exact
    Anderson and Hsiao (1981) and
    Suffix
    Holtz-Eakin, Newey, and Rosen (1988). Their approach involves taking the first difference of equation (5) to remove the individual effects, as follows: .(6) xit,αi εit, yit,yit1–,–φyit1–,yit2–,–()xit,xit1–,–()'βεit,εit1–,–()++= Although the model in first differences is still characterized by a correlation between the lagged dependent variable and the disturbance term, Anderson and Hsiao demonstra
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    They thus proposed instrumenting for the lagged dependent variable (i.e,), with either the lag of the level (i.e.,) or the first difference (i.e.,) of the dependant variable; both of these instruments are suitable, given that they are uncorrelated with the disturbance term (i.e., ) but correlated with the lagged dependent variable (i.e,).24
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    Arellano and Bond (1991)
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    build on this approach by taking advantage of the fact that there are many more instruments available that can be used in the context of a GMM estimator. The GMM estimator they develop thus relies on the use of a larger set of moment conditions than the estimator proposed by Anderson and Hsiao (1981), resulting in significant efficiency gains.
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    with the disturbance term (i.e., ) but correlated with the lagged dependent variable (i.e,).24 Arellano and Bond (1991) build on this approach by taking advantage of the fact that there are many more instruments available that can be used in the context of a GMM estimator. The GMM estimator they develop thus relies on the use of a larger set of moment conditions than the estimator proposed by
    Exact
    Anderson and Hsiao (1981),
    Suffix
    resulting in significant efficiency gains. More specifically, they suggest combining all available lagged values of the dependent variable with 23.And as Judson and Owen (1999) have shown using a Monte Carlo approach, this bias can be sizable even when the number of observations per cross-sectional unit (T) reaches 20 and 30.
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    The GMM estimator they develop thus relies on the use of a larger set of moment conditions than the estimator proposed by Anderson and Hsiao (1981), resulting in significant efficiency gains. More specifically, they suggest combining all available lagged values of the dependent variable with 23.And as
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    Judson and Owen (1999)
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    have shown using a Monte Carlo approach, this bias can be sizable even when the number of observations per cross-sectional unit (T) reaches 20 and 30. Therefore, given that our panel-data set has T = 25, estimating equation (4) using the standard fixed-effects model would yield biased estimates. 24.
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    all available lagged values of the dependent variable with 23.And as Judson and Owen (1999) have shown using a Monte Carlo approach, this bias can be sizable even when the number of observations per cross-sectional unit (T) reaches 20 and 30. Therefore, given that our panel-data set has T = 25, estimating equation (4) using the standard fixed-effects model would yield biased estimates. 24.
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    Arellano (1989) and Arellano and Bond (1991)
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    subsequently showed that it is better to use the lagged level than the lagged difference as an instrument, given that the latter results in an estimator with a very large variance. ()yit1–,yit2–,– yit2–,yit2–,yit3–,– ()εit,εit1–,–yit1–,yit2–,–() current and lagged values of the differences of the exogenous variables into a large instrument matrix; their GMM estimator then makes use of the moment c
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    –,yit2–,–() current and lagged values of the differences of the exogenous variables into a large instrument matrix; their GMM estimator then makes use of the moment conditions that these instruments will be orthogonal to the disturbance term. Their methodology also relies on the assumption that there is no second-order correlation in the first-differenced errors. Using this instrument matrix,
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    Arellano and Bond (1991)
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    derive a GMM estimator as well as two specification tests for this estimator that can be used to test the validity of the instruments: a test of second-order autocorrelation in the first-differenced residuals (them2 test for autocorrelation) and a Sargan test of over-identifying restrictions.
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    of the trade-weighted nominal exchange rate in industrialized countries leads to, on average, a 0.75 per cent increase in the annual rate of inflation of import prices in that same year, and a 0.91 per cent increase in the long run.30 These results are in line with estimates in the literature of exchange rate pass-through into import prices for industrialized countries. For instance,
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    Campa and Goldberg (2002)
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    find that the average rate of pass-through into import prices across their sample of 25 OECD countries over the period 1975–1999 is 0.61 in the short 30.As discussed in Bailliu and Bouakez (2004), the import price series for Canada—one of our sample countries—suffer from measurement error in that a number of Canadian import prices are constructed by multiplying the foreign currency price by the no
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    For instance, Campa and Goldberg (2002) find that the average rate of pass-through into import prices across their sample of 25 OECD countries over the period 1975–1999 is 0.61 in the short 30.As discussed in
    Exact
    Bailliu and Bouakez (2004),
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    the import price series for Canada—one of our sample countries—suffer from measurement error in that a number of Canadian import prices are constructed by multiplying the foreign currency price by the nominal exchange rate.
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    effects on the estimation results to be negligible. run and 0.77 in the long run.31Moreover, they find that partial pass-through is the best description for import price responsiveness in the short run (which, in their case, is one quarter), whereas full pass-through is generally supported as a longer run characterization.32 And in his study of exchange rate pass-through in euro-area countries,
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    Anderton (2003)
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    finds a pass-through rate of between 0.5 and 0.7 for extra-euro area imports. Our estimates are thus generally consistent with these results. We do find a higher degree of exchange rate pass-through in the short run, but this can be explained by the fact that the short run refers to one quarter in their studies, whereas it spans one year in our analysis.
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    For GMM2, the point estimates suggest that the short-run pass-through rates are 8 per cent for consumer prices and 20 per cent for producer prices (increasing to 16 per cent and 30 per cent, respectively, in the long run). Our estimate for long-run pass-through to consumer prices is comparable to that obtained by
    Exact
    Gagnon and Ihrig (2002).
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    33 5.Exchange Rate Pass-Through in Different Inflation Environments 5.1Identifying changes in the inflation environment A formal investigation of Taylor’s hypothesis requires a comparison of pass-through estimates under alternative inflation environments, where the shift results from a change in monetary policy.
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    environment A formal investigation of Taylor’s hypothesis requires a comparison of pass-through estimates under alternative inflation environments, where the shift results from a change in monetary policy. To identify changes in the inflation environment that are the result of a change in the monetary policy regime, we use a two-step approach. First, we use the multiple break test developed by
    Exact
    Bai and Perron (1998) to
    Suffix
    test for the presence of structural breaks in the inflation series in each country in the sample and, if breaks are identified, to determine the timing of these shift(s). This first step thus finds changes in the inflation environment that are significant enough to appear in the data.
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    Table 1: Identified Structural Breaks in Inflation and Corresponding Policy Change CountryDatePolicy Change Australia1982Q3Following a high-inflation period in the 1970s, there was a gradual shift in Australian monetary policy towards an approach that “. . . generally articulated a goal of disinflation”
    Exact
    (Gruen and Stevens 2000,
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    43). Australia1990Q3Although the formal announcement of an inflation target occurred in September 1994 in Australia, the shift in monetary policy towards a strategy focused on inflation control started a few years earlier (see Bernanke et al. (1999) for more details).
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    Australia1990Q3Although the formal announcement of an inflation target occurred in September 1994 in Australia, the shift in monetary policy towards a strategy focused on inflation control started a few years earlier (see
    Exact
    Bernanke et al. (1999)
    Suffix
    for more details). Belgium1985Q1After Belgium joined the European Monetary System (EMS) in 1979, there were frequent downward realignments of the Belgian franc until the mid-1980s, when Belgium started pursuing “a progressively tighter exchange rate policy” (Halikias 1993, 1).
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    Belgium1985Q1After Belgium joined the European Monetary System (EMS) in 1979, there were frequent downward realignments of the Belgian franc until the mid-1980s, when Belgium started pursuing “a progressively tighter exchange rate policy”
    Exact
    (Halikias 1993,
    Suffix
    1). Canada1982Q3As was the case in the United States, the Bank of Canada raised interest rates substantially in the early 1980s in order to reduce inflation. See Freedman (1982) for more details. This period also coincided with the end of the practice of targeting monetary aggregates at the Bank of Canada (officially cancelled in November 1982).
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    Belgium joined the European Monetary System (EMS) in 1979, there were frequent downward realignments of the Belgian franc until the mid-1980s, when Belgium started pursuing “a progressively tighter exchange rate policy” (Halikias 1993, 1). Canada1982Q3As was the case in the United States, the Bank of Canada raised interest rates substantially in the early 1980s in order to reduce inflation. See
    Exact
    Freedman (1982)
    Suffix
    for more details. This period also coincided with the end of the practice of targeting monetary aggregates at the Bank of Canada (officially cancelled in November 1982). Canada1990Q4The adoption of inflation targeting in Canada was announced in February 1991.
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    Denmark1982Q3In 1982, a new government took office in Denmark and announced radical measures to tackle the economic crisis the country was experiencing, including a strong commitment to a fixed exchange rate policy. See
    Exact
    Dahl and Hansen (2002)
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    for more details. Denmark1989Q3The exchange rate policy in effect since 1982 was further strengthened in the late 1980s when parities against the strongest currencies in the Exchange Rate Mechanism (ERM) were fixed.
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    57381
    Prefix
    Denmark1989Q3The exchange rate policy in effect since 1982 was further strengthened in the late 1980s when parities against the strongest currencies in the Exchange Rate Mechanism (ERM) were fixed. See
    Exact
    Christensen and Topp (1997)
    Suffix
    for more details. Spain1983Q4Starting in 1978, the Spanish central bank began to take an active role in monetary policy by publicly announcing monetary growth target rates as a means of reducing inflation.
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  45. Start
    58176
    Prefix
    Finland1984Q1Starting in the early 1980s, the exchange rate was used as a nominal anchor in Finland in an attempt to eliminate the inflation-devaluation cycle that had afflicted the country for most of the post-war period (see
    Exact
    Honkapohja and Koskela (1999)
    Suffix
    for more details). Finland1991Q1Finland abandoned its “hard-currency” exchange rate policy in 1991 following the economic crisis brought on by the collapse of the Soviet Union (see Honkapohja and Koskela (1999) for more details). (cont.
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  46. Start
    58384
    Prefix
    , the exchange rate was used as a nominal anchor in Finland in an attempt to eliminate the inflation-devaluation cycle that had afflicted the country for most of the post-war period (see Honkapohja and Koskela (1999) for more details). Finland1991Q1Finland abandoned its “hard-currency” exchange rate policy in 1991 following the economic crisis brought on by the collapse of the Soviet Union (see
    Exact
    Honkapohja and Koskela (1999)
    Suffix
    for more details). (cont.) Table 1: Identified Structural Breaks in Inflation and Corresponding Policy Change (cont.) CountryDatePolicy Change France1985Q1Several important changes were made to French monetary policy from 1983 to 1987, including the adoption of a policy of competitive disinflation (which began in 1983 but took several years to complete) and a major reform of French financial marke
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  47. Start
    58891
    Prefix
    Policy Change (cont.) CountryDatePolicy Change France1985Q1Several important changes were made to French monetary policy from 1983 to 1987, including the adoption of a policy of competitive disinflation (which began in 1983 but took several years to complete) and a major reform of French financial markets that profoundly changed the operating procedures of French monetary policy. See
    Exact
    Mojon (1999)
    Suffix
    for more details. France1992Q1France successfully defended its peg during the EMS crisis in 1992, demonstrating its commitment to the EMS and the impending European monetary union. United Kingdom 1982Q1Starting in mid-1979, monetary policy shifted significantly in the United Kingdom towards a much more restrictive policy aimed at bringing about a disinflation through higher interest rates.
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  48. Start
    59366
    Prefix
    United Kingdom 1982Q1Starting in mid-1979, monetary policy shifted significantly in the United Kingdom towards a much more restrictive policy aimed at bringing about a disinflation through higher interest rates. The disinflation occurred gradually over the period from 1980 to 1983. See
    Exact
    Nelson and Nikolov (2002)
    Suffix
    for more details. United Kingdom 1992Q1The United Kingdom exited the EMS in the wake of the crisis in September 2002 and announced the adoption of inflation targeting in October 1992. Italy1983Q4Following its decision to join the EMS in 1979, Italy began implementing an inflation stabilization program based on commitment to an exchange rate target.
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  49. Start
    59880
    Prefix
    Italy1983Q4Following its decision to join the EMS in 1979, Italy began implementing an inflation stabilization program based on commitment to an exchange rate target. Although the exchange rate anchor was initially rather weak owing to frequent realignments, the system became more stable in the mid-1980s (see
    Exact
    Detragiache and Hamann (1997)
    Suffix
    for more details). Spinelli and Tirelli (1993) identify 1984 as a key date in the transition to a new regime for monetary policy, since this is when the Bank of Italy began announcing targets for M2. Italy1996Q1After being forced out during the crisis in 1992, Italy re-enters the ERM in 1996.
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  50. Start
    59928
    Prefix
    Italy1983Q4Following its decision to join the EMS in 1979, Italy began implementing an inflation stabilization program based on commitment to an exchange rate target. Although the exchange rate anchor was initially rather weak owing to frequent realignments, the system became more stable in the mid-1980s (see Detragiache and Hamann (1997) for more details).
    Exact
    Spinelli and Tirelli (1993)
    Suffix
    identify 1984 as a key date in the transition to a new regime for monetary policy, since this is when the Bank of Italy began announcing targets for M2. Italy1996Q1After being forced out during the crisis in 1992, Italy re-enters the ERM in 1996.
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  51. Start
    60579
    Prefix
    Following the breakdown of the Bretton Woods system, the Dutch authorities decided to stabilize the guilder in terms of the Deutsche Mark. Although there were several devaluations in the 1970s, the peg stabilized in the early 1980s (the last devaluation was in 1983). See
    Exact
    Hilbers (1998)
    Suffix
    for more details. United States 1981Q2Paul Volker was appointed Chairman of the Federal Reserve in 1979 and orchestrated a disinflation by raising interest rates (they peaked in early 1981). United States 1990Q4A shift in U.
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  52. Start
    60992
    Prefix
    United States 1990Q4A shift in U.S. monetary policy in the 1990s has been identified and characterized as one in which the Federal Reserve responded more aggressively to rising inflation than in previous decades (see
    Exact
    Mankiw (2001)
    Suffix
    for more details). flexible version of inflation control. And finally, most of the European countries continued to rely on exchange rate pegs as a means of importing the low inflation rate of the core country of the Exchange Rate Mechanism (ERM), Germany. 5.2Panel pass-through estimates in different inflation environments Based on these identified structural breaks, we constructed the two dummy va
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  53. Start
    63651
    Prefix
    This could be due to the fact that many of the sample countries made more substantial reforms to their monetary policy regimes in the latter decade (for example, by adopting inflation targeting). Moreover, as discussed in
    Exact
    Paulin (2000),
    Suffix
    the 1990s were characterized by a period in which central banks acquired greater operational independence to pursue their policy objectives and became more open institutions. This trend most likely contributed to increasing both the effectiveness and credibility of policy actions.
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