4  The new profit margin will be (120–115)/115, which is just over 4 per cent of the purchase price. 5  Goldberg and Knetter (1997) summarise the results of the research. Adolfson (2004) also provides an excellent survey, together with new results. 6  See, for example, McCarthy (2000) and Bachetta and van Wincoop (2003). 7  However, there are some complications with dividing CPI into import prices and other prices. See Hansson and Johansson (2007). 8  See Burnstein, Eichenbaum and Rebelo (2002). BIS Review 3/2010  3  be various strategic reasons for not allowing import price increases to have a complete passthrough to consumers. Figure 1 illustrates some of the conclusions regarding the pass-through of the exchange rate. It shows the nominal exchange rate together with import and consumer prices in Sweden. We can see that import prices for consumer goods clearly co-vary with the nominal exchange rate, although there is no perfect correlation. It would thus appear that changes in the exchange rate nevertheless have a relatively large effect on these prices. Figure 1 Consumer prices, import prices of consumer goods and nominal trade-weighted exchange rate (TCW index) in Sweden Annual percentage change  Note. The import prices refer to consumer goods in the producer sector. Consumer prices are the CPI with a fixed interest rate (CPIF). Sources: Statistics Sweden and the Riksbank. We can also see that the relationship with the exchange rate is much weaker for consumer prices than for import prices.
Emerging markets in Asia and Latin America are now showing fairly good growth, while growth in the industrial nations in Europe and North America remains low. The fact that different parts of the world economy are developing fairly differently creates problems that have significance for monetary policy. The low short-term interest rates and good access to liquidity in Europe and North America make it attractive to borrow in the short term to invest in assets with a high expected yield. There have been reports of large capital inflows to several of the emerging markets. These inflows tend to push up asset prices – for instance, house prices and share prices – in several Asian countries. At the same time, the experiences gained from the financial crisis over the past year and during the Asian crisis of the 1990s indicate that these flows can change direction abruptly, which creates a risk of substantial falls in asset prices in the future. It is difficult to say what the consequences of the capital flows we are now seeing will be for the development of the world economy in the period ahead, but there is a risk that imbalances will be generated. Development in the economies that are now growing fairly quickly may be affected in the future either by tendencies towards asset bubbles or appreciating currencies, which would have a negative impact on their competitiveness.