This paper analyzes the dynamic effect of exchange rate changes on import
and domestic prices under the assumption that foreign variables such as oil
prices, U.S. stock prices, and yen/dollar exchange rates are block
exogenous. According to the empirical results, an increase in won/dollar
exchange rates generates stronger responses in contemporaneous import and
domestic prices when indirect causal relationships through other variables as
well as a direct causal relationship are considered together. The effect of
exchange rate pass-through on prices is also bigger in the long-run than in
the short-run. A 1% upward shift in won/dollar exchange rates has long-run
effects of 1.139%, 0.292%, and 0.115% on import, producer, and consumer
prices, respectively. In addition, the long-run effect of exchange rate
pass-through on import price is stronger when won/dollar exchange rates are
falling rather than rising. The size and statistical significance of asymmetric
effect become smaller in the order of import, producer, and consumer prices.