Exchange-Rate Pass-through to the Consumer Price Index: A Micro Approach

24/10/2006 |  Soffer Yoav
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Exchange-Rate Pass-through to the Consumer Price Index: A Micro Approach
Yoav Soffer
Abstract
This research estimates the pass-through from the exchange rate to the Consumer Price Index for 31 various components of the CPI, in an attempt to locate the sources of the pass-through, which has a significant effect on inflation and monetary policy in Israel. The rate of pass-through in general is about 29 percent, similar to that found in earlier research on the subject in Israel. It can also be seen that the pass-through has fallen in recent years with the stabilization of the exchange rate and the fall in inflation to levels prevalent in developed countries. In this research it was also found that the source of half of the pass-through was in the housing category, the result of widespread dollarization in the housing rental market, as well as of the method of calculation of the index of average prices of owner occupied dwellings. Further effects of dollarization can be seen in the prices of electricity, fuel and several other items. Most tradable goods have clear, positive pass-through, though this also holds true for a large number of nontradable goods and services. The effect of real activity in the economy on pass-through is not significant.
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