10 / 18  BIS central bankers' speeches  Note: The figure plots the impulse response of import prices to a negative 25 basis point cut in the short-term interest rate leading to 1% depreciation in the exchange rate under local currency (euro) pricing and dominant currency (dollar) pricing obtained in a calibrated small openeconomy model.
The degree of pass-through, in turn, has a strong influence on the transmission of shocks, which has differing implications for monetary policy. On the one hand, lower pass-through means that import prices are better shielded from exogenous exchange rate shocks, and monetary policy can focus more on domestic sources of inflationary pressures.