The Mongolian Exchange Rate

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Literature review Mongolian economy experienced relatively high inflation rate during the last two decades. For the central bank it is crucial to find the important factor of the inflation. Among the researches by economists pointed out the relationship between inflation and exchange rate as a important factor of the inflation. And economists more interested in the impact of exchange rate on inflation. Many economists explain that due to the fall in import price during the Asian crises in industrialized countries leaded the deflation in the late 1990s. Especially in 1990s deflation in US and US is resulted from decline of exchange rate depreciation and import deflation. And some analysts have pointed out that the greater openness of the country increases the exchange rate impact on inflation. As Goldberg and Knetter [1997] suggested analysts started to focus on pass-through of an exchange fluctuations on domestic prices. Since then, number of researchers studied exchange rate pass through on inflation in specific industry or macroeconomic pass through of specific country or group of countries depend on their general characteristics such as Woo 1984], Feinberg [1986; 1989], and Parsley and Popper [1998]. More narrowly, Campa and Goldberg [2005] estimated exchange rate pass through in more broader context in case of OECD countries. Choudhri, Faruqee, and Hakura [2005] found in their paper exchange rate pass through to import, consumer prices and producer for non-US G7 countries. However, paper didn’t extensively concentrate on monetary and real sector. In this paper, I employ VAR model which allows to measure pass-through from exchange rate fluctuations to inflation in an integrated way. Influences on pass through In acc... ... middle of paper ... ... Import share of consumption and inputs in production leads the higher pass through. Hence, countries or industries with high degree of openness tend to have greater exchange rate pass through. 4. Import structure: Pass through varies among the importing industries. Energy and raw material industries tend to have more pass through than manufactured products. (Jeevan Kumar (2007)) 5. International trade barriers (tariffs and quantitative restrictions): The barriers allow the arbitrage opportunities for international trade and affect pass through to be low 6. Opportunity cost: More specifically, menu cost affects the pass through. 7. Asymmetry effect: Pass through differs depending on exchange rate appreciation or depreciation. 8. Miscellaneous factors such as income transportation costs. The higher the income and transportation cost the lower the pass through.
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