The First and Second Stage Pass-through of Exchange Rates

What is it about?

We investigate the validity of the conventional wisdom that, unlike in developed countries, exchange rate pass-through should be ‘complete’ for developing economies. The transmission of exchange rate movements to import prices is found to be ‘complete’; however, the ‘second stage pass-through’ (pass-through to domestic prices) is found to be ‘partial’ both in the short and long run. Trade liberalization is also a significant phenomenon for the exchange rate pass-through.

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Why is it important?

The analysis has wider applicability to other small open economies.