Page 24 - Azerbaijan State University of Economics

Vugar Rahimov, Nigar Jafarova: The Exchange Rate Pass-Through to Aggregate
Consumer Price Index and Its Components In Azerbaijan

Even though there is huge evidence on the declining role of the ERPT for developed
economies, the channel still plays an important role for most emerging and developing
economies (Taylor 2000, Frankel, 2012). In most cases, the authors link the lower
ERPT in advanced economies to the adoption of IT regimes that enables to keep
inflation rates in a desirable level. It is noteworthy to mention that the cross-country
variation among emerging countries is also higher. Using SVAR methodology, Ito and
Sato (2006) show that the ERPT is higher in Latin American countries and in Turkey
than in East Asian countries. Overall, the ERPT was found to be lower on consumer
prices than on import prices in all sample countries. During the crisis periods, the
degree of the ERPT was quite high specifically in East Asian countries (Ito and Sato,
2006). Even developed countries exhibit differing responses to exchange rate shocks.
It was found that the ERPT is slightly higher in the euro area than in the US for both
consumer and import prices (Ca’Zorzi et al., 2007). Fendoğlu et al. (2019) show that
the degree of the ERPT is dependent on foreign currency indebtedness. According to
their estimation, foreign-currency indebtedness increases the coefficient of the ERPT
especially in the period following depreciation of the domestic currency. Using a
panel of more than hundred countries, Carranza et al. (2009) find that the degree of
pass-through in dollarized economies. According to them, another remarkable factor is
the regime of exchange rate, as “fixed exchange rates suffer more noticeably the
balance-sheet effects of large depreciations.”

A survey of literature on CIS countries shows that despite some heterogeneity
among member countries, the ERPT is higher in comparison with other emerging
countries (Table 1). The ERPT in these countries was assessed by applying panel
technique to CIS or emerging markets. By estimating short and long run relationship
for the period of 1999-2010, Beckmann and Fidrmuc (2013) find that the average
ERPT is 30-50 percent after one year and almost 60 percent in the long run. Due to
fixed exchange rate systems operating in CIS countries and low exchange rate
volatility, only few researchers attempted to study the sample countries individually.
Most of those papers have been devoted particularly to the study of the Russian case.
According to country specific estimates, in Russia the ERPT to consumer prices
ranges between 30-40 percent in the short run and reaches 50-70 percent within a
year (Stavrev, 2003; Oomes and Ohnsorge, 2005; Dobrynskaya and Levando, 2008).
By employing dynamic OLS for cointegrated regression, the pass-through to import
prices is estimated to be in the range of 29-31 percent during the first 12 months in
Kazakhstan (Moldasheva, 2013). To our knowledge, there is no paper on the ERPT
to aggregate CPI and its components devoted specifically to Azerbaijan case using
the recent period.

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