​Abstract

 

The transmission from the exchange rate to prices is a main component of the transmission mechanisms from monetary policy’s tools to its objectives, and is  the refore important in formulating monetary policy. Previous studies have attempted to analyze and understand the transmission by estimating inflation equations or, alternatively, have divided the Consumer Price Index into tradable and nontradable components through methods that are not based on quantitative data. This study proposes a precise calculation of the CPI components that are affected by the exchange rate—a calculation of the tradable component of the CPI that takes into account the fact that every product in the consumer basket is comprised of a tradable 
component and a nontradable component. Assuming that over the long term, there is full transmission of the tradable component of the CPI—at the level of precision calculated here—we can assume that the tradable component’s percentage of the CPI is an estimate of the overall transmission. The study presents the intuition behind the approach and the manner in which the various components are calculated through quantitative data on 159 industries, taken 
from input-output tables that have been classified into CPI components by industry.  Through a method that has not been previously used, the study calculates with a high  level of precision the rate of imported products out of the Consumer Price Index (27.5 percent)—which are comprised of imported production inputs (10.9 percent) and imported final products (16.6 percent)—and the rate of exportable products and import alternatives by industry. The study makes it possible to estimate not only the overall transmission over the long term, which, according to the results of this study, is 36 percent, but also its channels—the components that create it—by industry and by channel of effect.