It stands for exchange rate pass-through; a measure of the responsiveness of international prices to changes in exchange rates (local vs. foreign currencies). It reflects the elasticity of local-currency import prices with respect to the price of a foreign currency in terms of a local-currency.

In simple terms, it is the degree to which exchange rate movements are transmitted, passed through, to local prices (prices denominated in a local currency). The extent and dynamics of this measure are essential for forecasting models at a international level, particularly for evolution of prices and trade balance dynamics, and the direct implications for potential effect on a country’s monetary policy.

Empirical evidence shows that exchange rate pass-through is highest in essential goods such as energy products (electricity and gas) and water supply. On the other extreme, the lowest pass-through relates to capital goods. The reason for such a substantial discrepancy may be attributed to each group of products in terms of market structure and pricing mechanism: energy products are characteristically more homogeneous (and substitutable): their markets are highly competitive, and their prices are internationally set. To the contrary, capital goods are less homogeneous with less substitutions in the market. Their markets are less competitive, and their prices are usually set at local levels.