A causality test of inflation environment and lower exchange rate pass-through

Recent literature has argued that exchange rate pass-through (ERPT) into inflation has been declining following a dramatic change in inflation environment during the 1990s. We formally check this hypothesis for a sample of 12 emerging and developed economies, by m, g use of a state-space model that allows ERPT to be time-varying and dependent on the inflation environment, and testing whether inflation contains significant information about the future evolution of ERPT. The results reinforce the view of a smooth decline in the impact of exchange rates on inflation, but do not support the hypothesis that lower inflation precedes this declining ERPT.