What Do We Know of Exchange Rate Pass Through?
Domestic prices in an open economy are influenced by fluctuations of exchange rates. The effect of exchange rate changes on the domestic prices is termed exchange rate pass through (ERPT). When the variations in exchange rate are fully transmitted in the domestic prices, then it is known as complete ERPT and vice versa. Theoretically, the degree and speed of ERPT varies for the different types of price indices. It is the lowest in consumer price index and the highest in import prices. The literature also bifurcates the first stage and second stage pass through.