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Asymmetric Exchange Rate Pass‐through in Sudan: Does Inflation React Differently during Periods of Currency Depreciation?

Asymmetric Exchange Rate Pass‐through in Sudan: Does Inflation React Differently during Periods... IntroductionThe changes in consumer price index in a country reflect the instability of the macroeconomic condition. Inflation is closely linked to variables, such as real GDP, monetary policy, and nominal exchange rate. The experience of many countries shows that inflation and exchange rate depreciation are closely connected. The consensus is that there is no one‐to‐one response of either consumer or import prices to changes in exchange rates (see Devereux et al., ; Campa and Goldberg, ). The exchange rate pass‐through (ERPT, hereafter) to the domestic prices is an important issue for monetary and exchange rate policies. A low pass‐through implies that monetary authority may be less concerned about the potential consequence of exchange rate fluctuations. ERPT has important implications for the authority in terms of the design of monetary policy and trade implication of an exchange rate shock. For a current account deficit country like Sudan, a decline in pass‐through raises a question regarding the channel by which current account imbalances can be adjusted.In a seminal paper, Taylor () argues that low ERPT depends on a low level of inflation, whereas in a high inflationary environment, we expect to observe a larger ERPT. The increase in pricing power is http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png African Development Review Wiley

Asymmetric Exchange Rate Pass‐through in Sudan: Does Inflation React Differently during Periods of Currency Depreciation?

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References (30)

Publisher
Wiley
Copyright
© 2017 African Development Bank
ISSN
1017-6772
eISSN
1467-8268
DOI
10.1111/1467-8268.12280
Publisher site
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Abstract

IntroductionThe changes in consumer price index in a country reflect the instability of the macroeconomic condition. Inflation is closely linked to variables, such as real GDP, monetary policy, and nominal exchange rate. The experience of many countries shows that inflation and exchange rate depreciation are closely connected. The consensus is that there is no one‐to‐one response of either consumer or import prices to changes in exchange rates (see Devereux et al., ; Campa and Goldberg, ). The exchange rate pass‐through (ERPT, hereafter) to the domestic prices is an important issue for monetary and exchange rate policies. A low pass‐through implies that monetary authority may be less concerned about the potential consequence of exchange rate fluctuations. ERPT has important implications for the authority in terms of the design of monetary policy and trade implication of an exchange rate shock. For a current account deficit country like Sudan, a decline in pass‐through raises a question regarding the channel by which current account imbalances can be adjusted.In a seminal paper, Taylor () argues that low ERPT depends on a low level of inflation, whereas in a high inflationary environment, we expect to observe a larger ERPT. The increase in pricing power is

Journal

African Development Review – Wiley

Published: Sep 1, 2017

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