Exchange-rate pass-through (ERPT) is a measure of how responsive international prices are to changes in exchange rates.
Formally, exchange-rate pass-through is the elasticity of local-currency import prices with respect to the local-currency price of foreign currency, often measured as the percentage change, in the local currency, of import prices resulting from a one percent change in the exchange rate between the exporting and importing countries. A change in import prices affects retail and consumer prices. When exchange-rate pass-through is greater, there is more transmission of inflation between countries. Exchange-rate pass-through is also related to the law of one price and purchasing power parity.
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Measurement of exchange-rate pass-through is typically performed using aggregate price indexes. Some studies have examined how firms in different industries or with different production costs differ in their responses to exchange rates. Studies of firm-level differences explain why exchange-rate pass-through is not equal to one and how globalization caused a decrease in exchange-rate pass-through.
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