Disaggregated Evidence for Exchange Rate and Import Price Pass-through in the Light of Identification Issues, Aggregation Bias and Heterogeneity

Disaggregated Evidence for Exchange Rate and Import Price Pass-through in the Light of Identification Issues, Aggregation Bias and Heterogeneity

Title:

Disaggregated Evidence for Exchange Rate and Import Price Pass-through in the Light of Identification Issues, Aggregation Bias and Heterogeneity

Number:

17/08

Author(s):

M. Utku Özmen, Meltem Topaloğlu

Language:

English

Date:

April 2017

Abstract:

For emerging market economies, changes in import prices and exchange rate are among the major determinants of inflation. In general, studies analyzing the pass-through of foreign prices into inflation consider the headline inflation. However, such an approach may suffer from aggregation bias and may not reveal the differences in pass-through due to heterogeneous nature of the CPI. In this paper, we try to investigate the impact of such issues on the pass-through analysis for Turkey over the sample period of 2005-2015. We propose a disaggregated approach and run an extended VAR model for each of 152 subcomponents of the CPI separately. Then, we aggregate the individual impulse-responses of those components with significantly positive response to exchange rate and import prices. Our results reveal a significant heterogeneity in pass-through coefficients across subcomponents of the CPI. We show that the foreign price pass-through is also sizeable in food and services, as well as in core goods and energy. Our findings further point to a clear aggregation bias. Once the disaggregated approach is used, we report a higher pass-through from the exchange rate to the headline inflation.

Keywords:

Inflation, Pass-Through, Exchange-Rate, Import Prices, VAR Analysis, Turkey

JEL Codes:

E31; E58; F31

Disaggregated Evidence for Exchange Rate and Import Price Pass-through in the Light of Identification Issues, Aggregation Bias and Heterogeneity
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