How big is the comeback? Japanese exchange rate pass-through assessed by time-varying FAVAR

Zakaria Moussa (1)

1 LEMNA - Laboratoire d'économie et de management de Nantes Atlantique

We examine the evolution and the magnitude of exchange rate pass-through (ERPT) to Japanese prices. We employ the Time-Varying-Parameters Factor-Augmented Vector autoregression model (TVP-FAVAR), which enables us to include a large enough panel of data to better control for variables impacting prices and exchange rates. Our results confirm the decline in ERPT rates until the late 2000s and their resurgence in last years. Our findings provide additional support to the notion that exchange rates can impact import and domestic prices, possibly helping avoid deflation. We also find that the ERPT into aggregate prices can hide considerable variation in price sensitivity to exchange rates across stages of demand and industries. ERPT decreases along the pricing chain, from imported raw materials and intermediate goods prices to domestic prices. Finally, we find price sensitivity consistent throughout, indicating that incorporating extra information leads to more robust estimates.

Keywords: exchange rate pass-through; Japan; import prices; domestic prices; TVP-FAVAR model; JEL classification: E31; F31; F41 exchange rate pass-through; exchange rate pass-through

Domains: Economics and Finance

Zakaria Moussa. How big is the comeback? Japanese exchange rate pass-through assessed by time-varying FAVAR. SSRN Electronic Journal, 2016, ⟨10.2139/ssrn.2743228⟩. ⟨hal-03714934⟩