However, the extent of pass-through (ie the impact of exchange rate movements on prices) varies over time and across countries (Forbes et al (2017)). Reflecting differences in market size and sectoral composition of imports (the lack of which in earlier estimations was part of the reason for the limited estimated impact on aggregate prices), pass-through coefficients have been found to vary greatly across sectors: they are higher for commodities and lower for highly differentiated manufacturing products (Amiti et al (2014) and Chen and Juvenal (2016)). They also vary across countries. An important determinant of pass-though is the currency of invoice, which is often the US dollar. The United States has a low pass-through of 0.4, for example, while smaller, more open economies have coefficients estimated to be closer to one (Gopinath (2015) and Casas et al (2017).<sup>43</sup> Exchange rates and macroeconomic aggregates. Exchange rates, real and nominal, are much more volatile than output (see Burstein et al (2007)). For example, the real effective exchange rate for advanced economies in the post-Bretton Woods era is on average more than two times more volatile than output (Table 2A). At the same time, the contemporaneous correlations (as well as the lead and lag relations) between real and nominal exchange rates and output are very low for advanced economies (Table 2B).

A large research programme analyses the direct linkages between movements in exchange rates and macroeconomic aggregates (Cordella and Gupta (2015)). Most studies show that currency depreciations (appreciations) are associated with a contraction (expansion) of investment (see Landon and Smith (2009), Goldberg (1993) and Campa and Goldberg (1999)). The strength of this relationship, however, varies across sectors, countries and time horizon. Some other studies consider the impact of real exchange rate volatility on investment and international trade (see Darby et al (1999), McKenzie (1999), Chowdhury (1993), Caballero and Corbo (1989) and Grier and Smallwood (2013)). Others, such as Harchaoui et al (2005), find ambiguous results of exchange rate volatility on investment, which is consistent with theoretical models. Habib et al (2017) find that a real appreciation (depreciation) is associated with significantly lower (higher) GDP growth but only for developing and currency-pegging countries.

Although standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange rate depreciation, empirical studies investigating this relationship do not report conclusive results (Backus and Smith (1993) and Obstfeld (2007)). One strand of the literature considers the effects of exchange rate devaluations. In many cases, real depreciations are contractionary, which is not consistent with the predictions of basic models for which a positive output effect results from an increase in net exports (see Burstein et al (2005) and Kearns and Patel (2016)). Other studies, though, suggest that any contractionary impact of devaluations tends to disappear in the longer run (IMF (1999, 2005)).

Exchange rates and the current account. Although the empirical linkages between exchange rates, trade volumes and current accounts are weak in the short run, they reappear in the longer run (IMF (2015)). Because of limited pass-through, low short-run elasticities 43 This difference relates to the stronger domestic competition for imported goods in the United States and the international use of the US dollar in the invoicing of exports and imports (Goldberg and Tille (2008). Another factor here is the role of vertical specialisation. Chinn (2010) shows that, combined with changing tariff rates and transportation costs, it can account for the high-income elasticities typically found for trade. A number of studies analyse the extent of pass-through, see Campa and Goldberg (2005), Hellerstein et al (2006), Thomas and Marquez (2009), Frankel et al (2010) and IMF (2006). Campa and Goldberg (2005) also document that import prices in local currencies reflect 60% of exchange rate fluctuations in the short run, with this fraction increasing to 80% in the long run.

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