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To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jimonfin.2005.11.009 Byline: Ehsan U. Choudhri (a), Dalia S. Hakura (b) Abstract: The paper tests a hypothesis suggested by J. Taylor [2000. Low inflation, pass-through, and the pricing power of firms. European Economic Review 44 (7), 1389-1408] that a low inflationary environment leads to a low exchange rate pass-through to domestic prices. To test this hypothesis, the paper derives a pass-through relation based on new open-economy macroeconomic models. A large database that includes 1979-2000 data for 71 countries is used to estimate this relation. There is strong evidence of a positive and significant association between the pass-through and the average inflation rate across countries and periods. The inflation rate, moreover, dominates other macroeconomic variables in explaining cross-regime differences in the pass-through. Author Affiliation: (a) Carleton University, Ottawa, Ontario K1S 5B6, Canada (b) International Monetary Fund, Washington, D.C. 20431, USA

The paper tests a hypothesis suggested by J. Taylor [2000. Low inflation, pass-through, and the pricing power of firms. European Economic Review 44 (7), 1389-1408] that a low inflationary environment leads to a low exchange rate pass-through to domestic prices. To test this hypothesis, the paper derives a pass-through relation based on new open-economy macroeconomic models. A large database that includes 1979-2000 data for 71 countries is used to estimate this relation. There is strong evidence of a positive and significant association between the pass-through and the average inflation rate across countries and periods. The inflation rate, moreover, dominates other macroeconomic variables in explaining cross-regime differences in the pass-through. JEL classification: F41; E31; E52 Keywords: Pass-through; Inflation; Exchange rate

This paper examines the performance of a variety of new open economy macroeconomic models in explaining the exchange rate pass-through in a wide range of prices. Quantitative versions of different models are used to derive the dynamic response of various prices to an exchange rate shock. Predicted responses are compared with the evidence based on VAR models to examine how well different models fit the data. The results show that the best-fitting model incorporates a number of features highlighted by different strands of the literature: sticky prices, sticky wages, distribution costs and a combination of local (LCP) and producer currency pricing (PCP). Keywords: Exchange rate pass-through; New open economy macroeconomic models; Nominal rigidities; Local currency pricing; Distribution costs JEL classification: E31; F41

This paper examines the role of international differences in production techniques in explaining the empirical failure of the Heckscher-Ohlin-Vanek (HOV) model. It develops a modified HOV model that relaxes the assumption of identical production techniques across countries and can be estimated using input-output data of individual countries. The contribution of international differences in techniques to net factor trade patterns is then isolated by comparing the performance of the strict and modified HOV models. The paper finds that allowing for international technique differences significantly improves the predictive power of the HOV model. Keywords: Heckscher-Ohlin-Vanek Model; International technology differences JEL classification: F11; F13; F14