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Abstract

This paper investigates the relationship between exchange rate pass-through and exchange rate appreciations/depreciations and inflation by estimating nonlinear time series models. Motivated by theoretical and empirical results in the literature, the paper proposes new econometric models that can characterize nonlinear and asymmetric dynamics between import prices and exchange rate changes in a parsimonious fashion. Findings show the presence of complete and incomplete pass-through regimes depending upon the magnitude of appreciations of a currency and inflation rates both in the short-run and in the long-run. Results also reveal threshold effects and asymmetry in the pass-through relationship over appreciations/depreciations as well as inflationary and disinflationary periods. Findings have important macroeconomic policy implications.

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File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1033.pdf
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Bibliographic Info

Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1033.

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Length: 40 pages
Date of creation: Nov 2010
Date of revision:
Handle: RePEc:koc:wpaper:1033

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Related research

Keywords: Conditional CAPM;

This paper has been announced in the following NEP Reports:

• NEP-ALL-2010-11-13 (All new papers)
• NEP-MON-2010-11-13 (Monetary Economics)
• NEP-OPM-2010-11-13 (Open Economy Macroeconomic)

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1. Andrew Atkeson & Ariel Burstein, 2007. "Pricing-to-market, trade costs, and international relative prices," Working Paper Series 2007-26, Federal Reserve Bank of San Francisco.
   
   • Andrew Atkeson & Ariel Burstein, 2008. "Pricing-to-Market, Trade Costs, and International Relative Prices," American Economic Review, American Economic Association, vol. 98(5), pages 1998-2031, December.
   • Andrew Atkeson & Ariel Burstein, 2008. "Pricing-to-market, trade costs, and international relative prices," Staff Report 404, Federal Reserve Bank of Minneapolis.
2. 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.
   
   • Eitrheim, Oyvind & Terasvirta, Timo, 1996. "Testing the adequacy of smooth transition autoregressive models," Journal of Econometrics, Elsevier, vol. 74(1), pages 59-75, September.
3. Gust, Christopher & Leduc, Sylvain & Vigfusson, Robert, 2010. "Trade integration, competition, and the decline in exchange-rate pass-through," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 309-324, April.
   
   • Christopher Gust & Sylvain Leduc & Robert Vigfusson, 2006. "Trade Integration, Competiton, and the Decline in Exchange-rate Pass-through," 2006 Meeting Papers 165, Society for Economic Dynamics.
   • Christopher Gust & Sylvain Leduc & Robert J. Vigfusson, 2006. "Trade integration, competition, and the decline in exchange-rate pass-through," International Finance Discussion Papers 864, Board of Governors of the Federal Reserve System (U.S.).

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