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Nonlinear Mechanism of the Exchange Rate Pass-Through: Does Business Cycle Matter?

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  • Nidhaleddine Ben Cheikh

    ()
    (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes I - Université de Caen Basse-Normandie)

Abstract

This paper examines the presence of nonlinear mechanism in the exchange rate pass-through (ERPT) to CPI inflation for 12 euro area (EA) countries. Using logistic smooth transition models, we explore the existence of nonlinearity with respect to economic activity along the business cycle. Our results provide a strong evidence of nonlinearity in 6 out of 12 EA countries with significant differences in the degree of ERPT between the periods of expansion and recession. However, we find no clear direction in this regime-dependence of pass-through to business cycle. In some countries, ERPT is higher during expansions than in recessions; however, in other countries, this result is reversed. These cross-country differences in the nonlinear mechanism of pass-through would have important implications for the design of monetary policy and the control of inflation in the EA context.

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Paper provided by HAL in its series Working Papers with number halshs-00731502.

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Date of creation: 10 Sep 2012
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Handle: RePEc:hal:wpaper:halshs-00731502

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Keywords: Exchange Rate Pass-Through; Inflation; Smooth Transition Regression;

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  1. Arnildo da Silva Correa & André Minella, 2006. "Nonlinear Mechanisms of the Exchange Rate Pass-Through: a Phillips curve model with threshold for Brazil," Working Papers Series, Central Bank of Brazil, Research Department 122, Central Bank of Brazil, Research Department.
  2. Eiji Fuji & Jeannine Bailliu, 2004. "Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation," Computing in Economics and Finance 2004, Society for Computational Economics 135, Society for Computational Economics.
  3. Mototsugu Shintani & Akiko Terada-Hagiwara & Tomoyoshi Yabu, 2012. "Exchange rate pass-through and inflation: a nonlinear time series analysis," Vanderbilt University Department of Economics Working Papers 12-00008, Vanderbilt University Department of Economics.
  4. Reginaldo P. Nogueira Junior & Miguel Leon-Ledesma, 2008. "Exchange Rate Pass-Through Into Inflation: The Role of Asymmetries and NonLinearities," Studies in Economics, Department of Economics, University of Kent 0801, Department of Economics, University of Kent.
  5. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
  6. Kozluk, Tomasz & Banerjee, Anindya & de Bandt, Olivier, 2008. "Measuring Long-Run Exchange Rate Pass-Through," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(6), pages 1-36.
  7. van Dijk, Dick & Teräsvirta, Timo & Franses, Philip Hans, 2000. "Smooth Transition Autoregressive Models - A Survey of Recent Developments," Working Paper Series in Economics and Finance 380, Stockholm School of Economics, revised 17 Jan 2001.
  8. Eitrheim, Øyvind & Teräsvirta, Timo, 1995. "Testing the Adequacy of Smooth Transition Autoregressive Models," Working Paper Series in Economics and Finance 56, Stockholm School of Economics.
  9. Patricia S. Pollard & Cletus C. Coughlin, 2004. "Size matters: asymmetric exchange rate pass-through at the industry level," Working Papers, Federal Reserve Bank of St. Louis 2003-029, Federal Reserve Bank of St. Louis.
  10. Ilan Goldfajn & Sérgio Ribeiro da Costa Werlang, 2000. "The Pass-through from Depreciation to Inflation: A Panel Study," Working Papers Series, Central Bank of Brazil, Research Department 5, Central Bank of Brazil, Research Department.
  11. Valerie Herzberg & George Kapetanios & Simon Price, 2003. "Import prices and exchange rate pass-through: theory and evidence from the United Kingdom," Bank of England working papers 182, Bank of England.
  12. Mario Marazzi & Nathan Sheets & Robert J. Vigfusson & Jon Faust & Joseph Gagnon & Jaime Marquez & Robert F. Martin & Trevor Reeve & John Rogers, 2005. "Exchange rate pass-through to U.S. import prices: some new evidence," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 833, Board of Governors of the Federal Reserve System (U.S.).
  13. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, Elsevier, vol. 44(7), pages 1389-1408, June.
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