What You Are Actually Targeting
The Shock and the Echo
A currency falls 20%. How much of that reaches the shops, and when? The answer decides whether you move.
11 min150 XP available4 challenges
Only the imported part of the basket is exposed to the exchange rate, and only some of the currency move is passed on — importers absorb part of it in their margins, contracts are hedged for a while, and distribution and retail costs are domestic whatever happened to the currency. The pass-through coefficient is the share that arrives, and it is not a constant: it is higher in a small open economy, higher when firms expect the move to last, and much higher in a country where prices are quoted in dollars out of habit.
Added to inflation
2.1%
depreciation × import share × pass-through
A small open economy sits at the top of this range
Rises with credibility problems and with dollarisation
Put more than 4 percentage points on inflation from the exchange rate alone
- Try 10% — not yet
- Try 100% — not yet
- Put more than 4 percentage points on inflation from the exchange rate alone — not yet
Answer to continue.