Exchange Rate Pass-Through, Monetary Policy, and Real Exchange Rates: Iceland and the 2008 Crisis
We use detailed data for Iceland to examine two often-neglected aspects of the “exchange rate pass-through” problem. First, we investigate whether the pass-through coefficient varies with the degree of “international tradability” of goods. Second, we analyze if the pass-through coefficient depends on the monetary policy framework. We consider 12 disaggregated price indexes in Iceland for 2003-2019, a period that includes Iceland’s banking and currency crisis of 2008. We find that the pass-through declined around the time Iceland reformed its “flexible inflation targeting,” and that the coefficients are significantly higher for tradable than for nontradable goods.
This paper is part of a research project on exchange rates and monetary policy at the Central Bank of Iceland. We thank Thórarinn G. Pétursson, Ásgeir Daníelsson, Karen Á. Vignisdóttir, and Lilja S. Kro for very helpful comments. We have benefited from comments by Ed Leamer. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.