Conditional Exchange Rate Pass-Through to Consumer Prices in Iran: A DSGE Approach

The main goal of this paper is to analyze the exchange rate pass-through, the relationship between exchange rate and prices, provided that a shock occurs and changes exchange rate and prices. The key point in this study is that exchange rate is considered as an endogenous variable. This issue is important because exchange rate pass-through due to specific shocks differs from case to case. Hence a dynamic stochastic general equilibrium model is presented and simulated for Iran. The accuracy of the model is analyzed by comparing the moments of the model and the moments of the quarterly data from 1988 to 2010. Then, exchange rate pass-through conditional on each shock (technology, oil revenue, foreign output, and demand for money, foreign interest rate and monetary policy shocks) is calculated by the ratio of covariance of the impulse response of price and exchange rate to variance of the impulse response of exchange rate. Finally, aggregate exchange rate pass-through is computed as the sum of conditional pass-through coefficients in each time weighted by the contribution of each shock. The biggest exchange rate pass-through to consumer prices belongs to oil revenue and foreign output shocks which amounts to about 1, and the smallest one is related to technology shock