Exchange Rate Pass-Through with Intertemporal Linkages : Evidence at the Commodity Level

This paper argues that the stability of exchange rate pass-through is not well tested in common econometric specifications of pass-through equations. This is because (a) expected future exchange rate changes are an importnt omitted variable in these estimations, and (b) the use of aggregate data complicates inference. commodity level estimates obtained from applying the Kalman filter are consistent with the apparent instability in aggregate pass-through. Moreover, by comparing these estimates to actual exchange rate movements, the observed instability is found to be consistent with forward-looking behavior as posited