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Revisiting the role of inflation environment in exchange rate pass-through: A panel threshold approach

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  • Ben Cheikh, Nidhaleddine
  • Louhichi, Waël

Abstract

This paper sheds new light on the role of inflation regimes in explaining the extent of exchange rate pass-through (ERPT) into import prices. In order to classify the 24 developing countries included in his study, Barhoumi (2006) chose an arbitrary threshold of 10% to split the sample between high and low inflation regimes. For more accuracy, our study uses a panel threshold framework where a grid search is used to select the appropriate threshold value. In a larger panel-data set including 63 countries over the 1992–2012 period, we find that there are two threshold points identified by the data, allowing us to split our sample into three inflation regimes. When estimating the ERPT for each group of countries, we point out a strong regime-dependence of pass-through to inflation environment, that is, the class of countries with higher inflation rates experiences the higher degree of ERPT.

Suggested Citation

  • Ben Cheikh, Nidhaleddine & Louhichi, Waël, 2016. "Revisiting the role of inflation environment in exchange rate pass-through: A panel threshold approach," Economic Modelling, Elsevier, vol. 52(PA), pages 233-238.
    • Handle: RePEc:eee:ecmode:v:52:y:2016:i:pa:p:233-238
    DOI: 10.1016/j.econmod.2014.11.004
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    1. Jeannine Bailliu & Eiji Fujii, 2004. "Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation," Staff Working Papers 04-21, Bank of Canada.
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    More about this item

    Keywords

    Exchange rate pass-through; Import prices; Panel threshold;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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