Global Commodity Prices, Monetary Transmission, and Exchange Rate Pass-Through in the Pacific Islands

July 1, 2012

Preview Citation

Format: Chicago

Shanaka J Peiris, and Ding Ding. Global Commodity Prices, Monetary Transmission, and Exchange Rate Pass-Through in the Pacific Islands, (USA: International Monetary Fund, 2012) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Pacific Islands countries are vulnerable to commodity price shocks, and this poses challenges to monetary policy. The high degree of exchange rate pass-through to headline inflation and the weak monetary transmission mechanism in PICs suggest a greater efficacy of exchange rate changes in affecting inflation rather than monetary policy. To assess the tradeoff between the use of the exchange rate and monetary policy in macroeconomic stabilization, we employ a model-based approach to examine the optimal policy in response to the historical distribution of exogenous shocks in a Pacific Island (Tonga). The empirical evidence and model simulations tilt in the favor of exchange rate policy given the close relationship between exchange rate changes and headline inflation and the low interest rate sensitivity of aggregate demand.

Subject: Commodity prices, Exchange rate adjustments, Exchange rates, Foreign exchange, Inflation, Prices, Real exchange rates

Keywords: Basket regime, Commodity Prices, Demand condition, Exchange rate adjustments, Exchange rate basket regime, Exchange rate channel, Exchange rate fluctuation, Exchange Rate Pass-Through, Exchange rate transmission, Exchange rates, Food price inflation, Global, Headline inflation, Inflation, Inflation gap, Monetary Policy, Oil price inflation, Pacific Islands, Real exchange rates, Transmission in PIC, WP

Publication Details

Pages:

16
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/176
Stock No:

WPIEA2012176
ISBN:

9781475505245
ISSN:

1018-5941

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