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This paper estimates pass-through of exchange rate changes to domestic inflation in Hong Kong in a two-step approach. The authors first estimate exchange rate pass-through to import prices and then from import price to domestic inflation using a Phillips-Curve model. They find that Hong Kong's exchange rate pass-through to import prices is relatively high compared to the OECD average, although Hong Kong also witnessed a decline of pass-through after 1991. With respect to exchange rate pass-through to domestic prices, they find that a 10% depreciation of the US dollar against all currencies except for the Hong Kong dollar would lead domestic prices to increase by 0.82 and 1.61 percent in the short run and medium run, respectively.
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