CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The need for appropriate adjustment mechanism to structural imbalances in many developed countries, especially after the Great Depression of 1929-1933, culminated in extensive researches on exchange rate pass-through (ERPT) with the primary objective of determining a nominal anchor for inflation and inflation expectations. It is widely believed that an understanding of the impact of exchange rate movement on prices would help to gauge the appropriate monetary policy response to currency movements. The increased openness of most developed economies and the incidence of large fluctuations in nominal exchange rates have led to a need for a better understanding of the determinants of the transmission of exchange rate changes into import prices.
Exchange rate pass-through refers to the change in domestic prices that can be attributed to a prior change in the nominal exchange rate. In other words, it is the effect of a change in the exchange rate on domestic prices. Balance of payment postulations normally assume a one-to-one response of import prices to exchange rates, which is known as complete exchange rate pass-through (Peter, 2003). A one-to-one response of import prices to exchange rate changes is known as complete ERPT while a less than one-to-one response is known as partial or incomplete ERPT. The rate of ERPT has important implications for the effect of monetary policy on domestic prices as well as for the transmission of macroeconomic shocks and the volatility of the real exchange rate.
According to An, (2006) understanding of exchange rate pass-through is of extreme importance for three key reasons: First, the knowledge of the degree and timing of pass-through are essential for the proper assessment of monetary policy transmission on prices as well as for inflation forecasting. Second, the adoption of inflation targeting requires knowledge of the size and speed of exchange rate pass-through into inflations. Finally, the degree of exchange rate pass-through has important implication for “expenditure switching” effects from the exchange rate.
| Review project details | Comments |
|---|---|
| Number of Pages | 128 pages |
| Chapter one (1) | Yes Introduction |
| Chapter two (2) | Yes Literature review |
| Chapter three (3) | Yes methodology |
| Chapter four (4) | Yes Data analysis |
| Chapter five (5) | Yes Summary,discussion & recommendations |
| Reference | Yes Reference |
| Questionnaire | Yes Questionnaire |
| Appendix | yes Appendix |
| Chapter summary | yes 1 to 5 chapters |
| Available document | PDF and MS-word format |
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