04/11/2025 | 12:45 

Vincent Notte 

(IRES/LIDAM, UCLouvain)

will give a presentation on 

Exchange rate pass-through and monetary policy: a counterfactual SVAR analysis

Abstract

Understanding how exchange rate fluctuations are transmitted to inflation is critical for monetary policy design. While former literature finds that the exchange rate pass-through (ERPT) varies with the underlying shocks, it largely abstracts from the role of endogenous monetary policy responses. This paper investigates the contribution of monetary policy to shock-dependent ERPT. Using a structural VAR framework, we identify a broad set of structural shocks and estimate ERPT across 26 emerging markets and advanced economies. We then construct a counterfactual scenario in which monetary policy remains unresponsive to these shocks. Our results show that 90 percent of the observed variation in ERPT across shocks stems from the monetary policy response. When policy reactions are neutralized, the ERPT becomes nearly uniform across shocks and, on average, twice as large. These findings disentangle structural from policy-driven components of the shock-dependent ERPT, thereby providing a more informative measure for central bank decision-making.