Comment on “A Pass‐Through Revival”

• Published date: 01 January 2014
• DOI: http://doi.org/10.1111/aepr.12054
• Date: 01 January 2014
• Author: Kiyotaka Sato

Comment on “A Pass-Through Revival”

Kiyotaka SATO†

Yokohama National University

JEL codes: F41, E31

Taylor (2000) pointed out a decline of the exchange rate pass-through starting from the

early 1990s, which has been supported by the subsequent empirical studies. However,

Shioji (2014) attempts to demonstrate empirically that the exchange rate pass-through in

Japanese imports has revived in recent years. Such a resurgence may be particularly

important for central banks that have to tackle a deflationary economy at the zero lower

bound of the nominal interest rate, because an exchange rate depreciation can raise

domestic price inflation as long as the transmission mechanism along the pricing chain

works well.

There have so far been a large number of studies on the exchange rate pass-through

of Japanese exports, but only a few studies have investigated the import side of exchange

rate pass-through in Japan. Recently, Shioji and his coauthors (e.g. Shioji & Uchino, 2011

and Shioji, 2012) employ a vector autoregressive (VAR) model to reveal the transmission

of exchange rate shock to the domestic price inflation. Shioji (2014) tries to develop his

previous research in the following way.

First, in addition to the traditional VAR approach, this paper employs the time-

varying parameter (TVP)-VAR with stochastic volatility method to allow the variance-

covariance matrix of the error terms to change over time, which enables us to draw

impulse responses at different points in time (see Shioji, (2013) for further details of the

TVP-VAR approach). This new method is particularly useful to evaluate how impulse

responses have changed over the sample period.

Second, various types of domestic prices are analyzed in Shioji (2014) to investigate

the transmission mechanism along the pricing chain. Specifically, while the existing

studies typically include the producer price index (PPI) and consumer price index (CPI)

in the VAR estimation, Shioji (2014) uses two types of corporate goods price index

(CGPI), that is, the CGPI for intermediate goods (CGPI-INT) and for consumer goods

(CGPI-CONS). Moreover, the CPI is decomposed into the CPI for goods (CPI-GOODS)

and the CPI for services (CPI-SERVICES). The transmission mechanism is examined

step-by-step by a simple correlation analysis among these price variables, a standardVAR

analysis, and a TVP-VAR analysis. In the VAR estimation, various combinations of price

variables are included to provide an accurate picture of the transmission mechanism of

an exchange rate shock from upstream to downstream producers.

The above two attempts are truly innovative and Shioji (2014) clearly shows

the recent resurgence of exchange rate pass-through in Japan. Furthermore, a policy

†Correspondence: Kiyotaka Sato, Department of Economics, Yokohama National University, 79-3

Tokiwadai,Hodogaya-ku, Yokohama,240-8501, Japan. Email: sato@ynu.ac.jp

bs_bs_banner

doi: 10.1111/aepr.12054 Asian Economic Policy Review (2014) 9, 139–140

© 2014 The Author

Asian Economic Policy Review © 2014 Japan Center for Economic Research 139