This paper compares the extent of exchange rate pass-through at the aggregate level into CPI and import prices in Singapore and Hong Kong for the period 1980 to 2005. A priori one might expect that these two economies which have relatively small markets and are highly open with high degree of dependence on foreign goods for domestic consumption, will be faced with relatively high exchange rate pass-through. Results suggest that exchange rate pass-through in Hong Kong is higher than in Singapore. The paper further examines whether pass-through has changed over time in the two economies.
Exchange rate pass-through (ERPT) is broadly defined as the percentage change in domestic prices in the importing nation’s currency due to a one percent change in the exchange rate between the trade partners. While the bulk of the literature to date on ERPT has focused on the US and other industrial countries, this paper examines the analytical and empirical literature on ERPT with particular reference to Asia. It is generally believed that since Asian economies are highly trade-dependent they are potentially susceptible to ERPT into domestic inflation. Particular attention is paid to production sharing -- which is a key characteristic of trade in Asia -- and its consequent implications for ERPT.