The Determinants of Time-Varying Exchange Rate Pass-Through in South Africa

The pass-through of shifts in the rand exchange rate to consumer price inflation has been well documented for South Africa. Although estimates of the absolute level of pass-through vary, some studies document a decline in pass-through over time. In order to better illuminate the policy implications of pass-through, this paper seeks to add to the literature by decomposing pass-through into a number of time-varying impulses. This has the advantage of providing deeper insights of pass-through over time and across various monetary policy regimes. We then analyse the determinants of time-varying pass-through. Our results confirm that pass-through has declined over time but is subject to a stable and low inflation environment. We also show that a volatile exchange rate leads to higher pass-through.