Working Paper - WP/12/08: Exchange Rate Pass-through to Import Prices, and Monetary Policy in South Africa
Janine Aron, Greg Farrell, John Muellbauer and Peter Sinclair
Last Modified Date:
2020-10-01, 09:31 PM
Publications > Working Papers
Understanding how import prices adjust to exchange rates helps anticipate inflation effects and monetary policy responses. This paper examines exchange rate pass-through to the monthly import price index in South Africa during 1980–2009. Various short-run pass-through estimates are calculated simply without recourse to a full structural model, yet without neglecting the long-run relationships between prices or the effects of previous import price changes, and controlling for domestic and foreign costs. Pass-through is incomplete at about 50 per cent within a year and 30 per cent in six months, averaging over the sample. Johansen analysis of a cointegrated system using impulse response functions broadly supports these short-run results, but as it includes feedback effects, implies lower pass-through for exchange rate shocks. This implies long-run pass-through of about 55 per cent compared to single-equation estimates of around 75 per cent. Shifts in pass-through with trade and capital account liberalisation in the 1990s are explored. There is evidence of slower pass-through under inflation targeting when account is taken of temporary shifts to foreign currency invoicing or increased hedging after large exchange rate shocks in the period. Furthermore, pass-through is found to decline with recent exchange rate volatility and there is evidence of asymmetry, with greater pass-through occurring for small appreciations.