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Exchange Rate Passthrough to Import Prices and Monetary Policy in South Africa

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  • Janine Aron
  • Greg Farrell
  • John Muellbauer
  • Peter Sinclair

Abstract

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 19802009. 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.

Suggested Citation

  • Janine Aron & Greg Farrell & John Muellbauer & Peter Sinclair, 2012. "Exchange Rate Passthrough to Import Prices and Monetary Policy in South Africa," Working Papers 5152, South African Reserve Bank.
    • Handle: RePEc:rbz:wpaper:5152
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    References listed on IDEAS

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    1. David C. Parsley, 2012. "Exchange Rate Pass-through in South Africa: Panel Evidence from Individual Goods and Services," Journal of Development Studies, Taylor & Francis Journals, vol. 48(7), pages 832-846, January.
    2. Gita Gopinath & Oleg Itskhoki, 2010. "Frequency of Price Adjustment and Pass-Through," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(2), pages 675-727.
    3. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
    4. Devereux, Michael B. & Engel, Charles, 2002. "Exchange rate pass-through, exchange rate volatility, and exchange rate disconnect," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 913-940, July.
    5. Kevin Nell, 2004. "The structuralist theory of imported inflation: an application to South Africa," Applied Economics, Taylor & Francis Journals, vol. 36(13), pages 1431-1444.
    6. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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