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Global integration has increased the international linkages of financial markets for emerging market countries. A key channel for the international transmission of inflation and economic cycles is from exchange rate movements to domestic prices, known as exchange rate pass-through (ERPT). This article reviews the conceptual, methodological and policy issues connected with ERPT in emerging market and developing countries, and critically surveys selected empirical studies. A key contribution is to categorise and compare the heterogeneous methodologies used to extract ERPT measures in the empirical literature. Single equation models and systems methods are contrasted; frequent misspecifications that produce unreliable ERPT estimates are highlighted. The discerning policy-maker needs to ascertain by which methods ERPT measures were calculated, the controls and restrictions applied, and the time frame and stability of the estimates. [ABSTRACT FROM PUBLISHER]

Understanding how import prices adjust to exchange rates helps anticipate inflation effects and monetary policy responses. This article examines exchange rate pass-through to the monthly import price index in South Africa during 1980–2009. Short-horizon pass-through estimates are calculated using both single equation equilibrium correction models and systems (Johansen) models, controlling for both domestic and foreign costs. Average pass-through is incomplete at about 50 per cent within a year and 30 per cent in six months, and in the long-run, from the Johansen analysis including feedback effects, is about 55 per cent. There is evidence of slower pass-through under inflation targeting; pass-through is found to decline with recent exchange rate volatility and there is evidence for asymmetry, with greater pass-through occurring for small appreciations. [ABSTRACT FROM PUBLISHER]

The interest in exchange rate pass-through (ERPT) in emerging market and developing economies has burgeoned in the last two decades. Small, open and trade-dependent economies embody special features that can make it difficult to obtain reliable estimates of ERPT. This Special Section includes a survey of recent research in developing and emerging market countries on ERPT, focusing on the monetary policy relevance of ERPT. The frequent misspecifications that produce unreliable ERPT estimates are highlighted. Many empirical issues raised in the survey are illustrated by the macro- and the micro-economic empirical studies on South Africa (SA) included in this Special Section, and an earlier published JDS paper on ERPT in SA. [ABSTRACT FROM PUBLISHER]

A sizeable literature examines exchange rate pass-through to disaggregated import prices, but few micro-studies focus on consumer prices. This article explores exchange rate pass-through to consumer prices in South Africa, for 2002–2007, using a unique data set of highly disaggregated data at the product and outlet level. The empirical approach allows pass-through to be calculated over various horizons for different goods and services. The heterogeneity of pass-through for food sub-components is considerable. Switches between import and export parity pricing of maize are found significant for five out of ten food sub-components. Using actual weights from the CPI basket, overall pass-through to the almost 63 per cent of the CPI covered is about 30 per cent after two years, and higher for food. [ABSTRACT FROM PUBLISHER]

This study estimates pass-through for South Africa using samples of final goods and services, and homogenous imports. Estimated pass-through to consumer goods prices is low, roughly 16 per cent in the two years following an exchange rate change; surprisingly, it is somewhat higher for services. Deviations from long run PPP appear to disappear relatively quickly, with a half-life of about 16 months. For imports, pass-through estimates are much higher, averaging around 60 per cent, but with wide source-country variation. Finally, there is virtually no support for a simple linear trend change in either pass-through or in reversion to PPP during the sample. [ABSTRACT FROM PUBLISHER]