Exchange-Rate Pass-Through to Consumer Prices in a Collapsing Peg: Evidence from Lebanon's Parallel Market, 2019–2026
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Through this study, I examine how much the collapse of the Lebanese pound passed through into consumer prices between the failure of the 1,507.5 LBP/USD peg in 2019 and the parallel market's stabilization around 89,500 LBP/USD. Lebanon offers an exceptionally clean setting to analyze exchange-rate pass-through: it is a small, import-reliant, heavily dollarized economy whose currency surrendered 98% of its value in under four years while the official rate stayed fixed. I build a monthly dataset covering 99 observations (January 2018 to March 2026) by combining the Central Administration of Statistics' consumer price index with the World Bank's Real-Time Exchange Rate parallel market estimates, which I cross-validated against crowd-sourced quotes from lirarate.org (yielding a 0.9999 correlation). Econometrically, I evaluate short-run dynamics using distributed-lag regressions with Newey–West standard errors, identify long-run relationships through cointegrating regressions and an error-correction model, and track structural changes over time via 24-month rolling regressions. Three main results stand out. First, total pass-through over the entire crisis was complete: consumer prices climbed 78-fold compared to a 59-fold surge in the parallel exchange rate, translating to a cumulative log elasticity of 1.07. Second, short-run transmission was quick yet partial: about 35–41% of any given month's depreciation hit the CPI within that same month, reaching roughly 46% within a quarter, while the remaining imbalance closed through error correction at 7.5% monthly (a half-life of nine months). Third, pass-through was unsteady over time: the rolling coefficient more than doubled from 0.29 in late 2021 to 0.67 by mid-2024 as local merchants shifted directly to pricing in USD. Even after the exchange rate froze in August 2023, prices continued rising by another 74% as subsidized and state-controlled prices adjusted upward, leaving annual inflation at 12–17% rather than dropping to zero. Ultimately, these findings reinforce Taylor's (2000) hypothesis that higher inflation environments amplify pass-through, proving that stabilizing the exchange rate is essential but not enough on its own to stop inflation in a dollarized economy.
Keywords
Consumer Prices, Currency Collapse, Dollarization, Exchange-Rate Pass-Through, Hyperinflation, Lebanon, Parallel Market