Page 17 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.78, # 2, 2021, pp. 17-42

THE EXCHANGE RATE PASS-THROUGH TO AGGREGATE
CONSUMER PRICE INDEX AND ITS COMPONENTS IN
AZERBAIJAN

Vugar Rahimov , Nigar Jafarova 2
1

1 Azerbaijan State University of Economics (UNEC), e-mail: [email protected]
2 Business Finance and Economics, graduated from University of Sheffield,
e-mail: [email protected]

Received: August 06; accepted December 17, 2021; published online December 24, 2021

ABSTRACT
In this study, we explore the pass-through of exchange rate (ERPT) fluctuations to
aggregate consumer price index (CPI) and its components, namely food, non-food,
and services components in Azerbaijan. Using quarterly data for the period 2003 to
2021, we estimate VAR models, derive impulse response functions and run variance
decompositions with the Cholesky ordering. We find significant but incomplete
pass-through on all components. The accumulated pass-through to aggregate CPI is
40 percent within one year. According to our empirical findings, the largest ERPT is
observed in the food component of CPI, which is 53 percent after four quarters
period. The corresponding pass-through coefficients for non-food and services CPI
are 35 and 19 percent respectively. Variance decomposition tables show that,
intuitively the exchange rate shock plays more important role on food and non-food
components compared to services components. Since the ERPT is an essential
ingredient of price developments in Azerbaijan, it should be assessed precisely and
taken into account in monetary policy decisions and inflation forecasting.

Keywords: Exchange rate pass-through, VAR model, food CPI, non-food CPI,
services CPI, impulse response functions

JEL classification: F31, E31, E52, C51, C52

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