Exchange Rate Changes and Inflation in Post-Crisis Asian Economies: Vector Autoregression Analysis of the Exchange Rate Pass-Through


  • Comments from Professors Eiji Ogawa, Etsuro Shioji, Yuri N. Sasaki, Junko Shimizu, Kentaro Kawasaki, Willem Thorbecke, Masaru Yoshitomi, and Yelena F. Takhtamanova were quite helpful. The authors are also thankful to anonymous referees and Editor Ogaki for their comments that improved the paper. Research support by JSPS Grant-in-Aid for Scientific Research (A-2), No. 15203008, to the first author is gratefully acknowledged.


Macro-economic consequences of large currency depreciations among the crisis-hit Asian economies varied from one country to another. Inflation did not soar after the Asian currency crisis of 1997–98 in most crisis-hit countries except Indonesia where high inflation followed a very large nominal depreciation of the rupiah. The high inflation meant a loss of price competitive advantage, a key for economic recovery from a crisis. This paper examines the pass-through effects of exchange rate changes on the domestic prices in the East Asian economies using a vector autoregression analysis. The main results are as follows: (i) the degree of exchange rate pass-through to import prices was quite high in the crisis-hit economies; (ii) the pass-through to Consumer Price Index (CPI) was generally low, with a notable exception of Indonesia; and (iii) in Indonesia, both the impulse response of monetary policy variables to exchange rate shocks and that of CPI to monetary policy shocks were positive, large, and statistically significant. Thus, Indonesia's accommodative monetary policy, coupled with the high degree of CPI responsiveness to exchange rate changes was an important factor in the inflation-depreciation spiral in the wake of the currency crisis.