Asymmetries in exchange rate pass-through and monetary policy principle: Some Caribbean empirical evidence

The study shows that nonlinear models yield superior unbiased estimates which are free of serial correlation, heteroscedasticity and functional form instability problems which often affect linear models. All six countries have partial exchange rate pass-through, with only The Bahamas recording the lowest pass-through comparable with developed countries which target inflation. The rest of countries, and to a lesser extent Barbados, have high exchange rate pass-through which signifies their vulnerabilities to external inflation. Depreciation results in higher pass-through than appreciation, especially during rising prices/inflation. Nonlinear/threshold cointegration exists in all six countries. TAR results show asymmetric adjustment towards long-run equilibrium in The Bahamas, Guyana and to a lesser extent Jamaica, and symmetric adjustment in Barbados, Belize and Trinidad-Tobago. M-TAR results show asymmetric adjustment in four countries, while Guyana and Trinidad-Tobago experience symmetric adjustment. Taylor’s rule is effective in The Bahamas, insignificant in Trinidad-Tobago; and ineffective in the rest of the countries. Appreciation is the most effective operating target for central banks to reduce inflation in The Bahamas, Barbados, Guyana and Jamaica.