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Does Trade Openness or Globalisation Matter for the Response of Inflation to Exchange Rate Depreciation Shocks?

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Exchange Rate, Second Round Effects and Inflation Processes

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Abstract

We find a negative relationship between trade openness, inflation and the exchange rate pass-through (ERPT) to inflation. Positive shocks to the trade openness lower the ERPT, and the decline is much bigger due to a persistent shock compared to a non-persistent shock. This indicates the direct effects of trade openness on ERPT. The counterfactual analysis reveals that increased trade openness dampens the increase in inflation due to exchange rate depreciation shocks. The negative business confidence channel and subdued GDP growth post 2008Q4, amplified the dampening ability of positive shocks to trade-openness to lower the ERPT.

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Notes

  1. 1.

    See Borio and Filardo (2007), Benigno and Faia (2016), and Sbordone (2008).

  2. 2.

    The high degree of pass-through for developing economies has been cited as rationale for the developing countries’ well documented fear of floating. Whether the ERPT is high or not it matters for the determination of the trade balance.

  3. 3.

    This is estimated using time-varying techniques and not the rolling regression approach whose results are based on an arbitrarily chosen moving window. The time-varying approach estimates the pass-through at each period.

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Authors and Affiliations

  1. South African Reserve Bank, Pretoria, South Africa

    Dr. Eliphas Ndou

  2. Pretoria, South Africa

    Nombulelo Gumata

  3. National Planning Commission Secretariat, Pretoria, South Africa

    Dr. Mthokozisi Mncedisi Tshuma

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  1. Dr. Eliphas Ndou
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  2. Nombulelo Gumata
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  3. Dr. Mthokozisi Mncedisi Tshuma
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Ndou, E., Gumata, N., Tshuma, M.M. (2019). Does Trade Openness or Globalisation Matter for the Response of Inflation to Exchange Rate Depreciation Shocks?. In: Exchange Rate, Second Round Effects and Inflation Processes. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-13932-2_16

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  • DOI: https://doi.org/10.1007/978-3-030-13932-2_16

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  • Publisher Name: Palgrave Macmillan, Cham

  • Print ISBN: 978-3-030-13931-5

  • Online ISBN: 978-3-030-13932-2

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