A New Look at Exchange Rate Pass Through in the G 7 Countries
This paper analyzes the exchange rate pass through (ERPT) to domestic prices (consumer and producer prices) and to import prices for the G 7 countries. It is our aim to answer three key questions with strong economic policy implications: (i) is there a lower rate of ERPT in countries with an increased emphasis in monetary policy based on price stability? (ii) is there a significant connection between ERPT and inflation volatility? and (iii) do exchange rate regimes have a role to explain the ERPT? Our findings suggest that: (i) Taylor's hypothesis holds; (ii) there is a robust and positive significant connection between ERPT and inflation volatility; and (iii) ERPT depends on the exchange rate regimes.