Monetary Autonomy and Exchange Rate Pass-Through: Evidence from Sweden and Denmark

Sammanfattning

This study examines how monetary regime choice conditions exchange rate pass-through and inflation transmission dynamics in Sweden and Denmark using quarterly data from 2000Q1--2024Q4. While the existing literature has extensively examined shock-dependent exchange rate pass-through (ERPT) and international monetary spillovers separately, less attention has been given to how exchange rate regimes shape inflation transmission across comparable small open economies exposed to common external shocks. Using a Global Vector Autoregressive (GVAR) framework with Cholesky identification, we trace the transmission of domestic, regional, and global shocks across two economies operating under distinct monetary arrangements. Our main finding is that monetary autonomy primarily conditions the speed and short-run magnitude of inflation adjustment rather than its long-run direction. Pass-through and inflation transmission further vary systematically with shock origin, consistent with the shock-dependent ERPT literature. The results suggest that exchange rate flexibility may alter the adjustment path of external shocks by slowing their domestic transmission, even if long-run inflation dynamics converge. These findings contribute to the literature on monetary regime choice and international inflation transmission, with particular relevance for debates concerning monetary autonomy in small open economies.