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Does exchange rate pass-through respond to measures of macroeconomic instability?

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Author Info

  • Reginaldo P. Nogueira, Jr.

    (IBMEC-MG)

  • Miguel A. León-Ledesma

    (University of Kent at Canterbury)

Abstract

We argue that, theoretically, exchange rate pass-through (ERPT) into consumer prices may be nonlinear in contrast to standard linear estimates found in the literature. ERPT can be higher in periods of financial or confidence crises, when firms have no incentive to absorb cost increases in their margins. We test this hypothesis applying a logistic smooth transition (LSTR) model to Mexican data. Using two different measures of macroeconomic instability as transition variables, we find that ERPT does seem to increase in periods of macroeconomic distress, which highlights the importance of a stable macroeconomic environment in reducing ERPT in emerging markets.

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Bibliographic Info

Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): XIV (2011)
Issue (Month): (May)
Pages: 167-180

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Handle: RePEc:cem:jaecon:v:14:y:2011:n:1:p:167-180

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Related research

Keywords: exchange rate pass-through; smooth transition regression models; emerging markets;

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Cited by:
  1. Ben Cheikh, Nidhaleddine, 2012. "Non-linearities in exchange rate pass-through: Evidence from smooth transition models," MPRA Paper 39258, University Library of Munich, Germany.
  2. Goodwin, Barry K. & Holt, Matthew T. & Prestemon, Jeffrey P., 2012. "Nonlinear exchange rate pass-through in timber products: the case of oriented strand board in Canada and the United States," MPRA Paper 40834, University Library of Munich, Germany.

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