Can exchange rate pass-throughs be perverse? A robust multiple-prior Bayesian SVAR approach*

Yushi Yoshida*, Weiyang Zhai

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

We apply a robust multiple-prior structural VAR model to estimate the exchange rate pass-through of Japan between January 1995 and July 2023, covering the unconventional monetary policy regime. In addition to traditional sign restrictions, we impose narrative sign restrictions on the basis of two economic episodes. According to conventional confidence intervals, the estimated exchange rate pass-through induced by exogenous exchange rate shocks or persistent global shocks is consistent with the conventional view; i.e., the depreciation of the Japanese yen induces inflation at the consumer level. On the other hand, we find evidence of a perverse exchange rate pass-through induced by demand shock. However, according to robust credible intervals, only the exchange rate pass-through induced by demand shock remains statistically significant. Thus, the demand-shock-induced exchange rate pass-through effect may be undermining the continuous efforts of the Bank of Japan to achieve the target of a two-percent inflation rate.

Original languageEnglish
Article number103312
JournalJournal of International Money and Finance
Volume154
DOIs
StatePublished - 2025/04

Keywords

  • Exchange rate pass-through
  • Narrative sign restrictions
  • Robust multiple-prior Bayesian
  • Structural VAR
  • Unconventional monetary policy

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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