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Non-linearities in exchange rate pass-through: Evidence from smooth transition models

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  • Ben Cheikh, Nidhaleddine

Abstract

This paper examines the presence of nonlinear mechanisms in the exchange rate pass-through (ERPT) to CPI inflation for 12 euro area (EA) countries. Using smooth transition models, we explore the existence of non-linearities with respect to three macroeconomic factors, namely inflation rate, exchange rate fluctuations and business cycle. Our results reveals that exchange rate transmission is higher when inflation rate surpass some threshold. We give a supportive evidence to the Taylor’s view that pass-through is decreasing in a lower and more stable inflation environment. Next, we check the asymmetry of pass-through with respect to both direction and magnitude of exchange rate. In one hand, results provide an asymmetrical ERPT to appreciations and depreciations, but there is no clear direction of asymmetry. In the other hand, the degree of pass-through is found to be higher for large exchange rate changes than for small ones. Finally, when we examine the non-linearities of ERPT relative to business cycle, we report that passthrough depends positively on economic activity; that is, when real GDP is growing above some threshold, the extent of ERPT becomes higher.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39258.

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Date of creation: Apr 2012
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Handle: RePEc:pra:mprapa:39258

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Keywords: Exchange Rate Pass-Through; Inflation; Smooth transition regression models; Euro area;

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  1. 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 135, Society for Computational Economics.
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  3. Arnildo da Silva Correa & André Minella, 2010. "Nonlinear mechanisms of the exchange rate pass-through: A Phillips curve model with threshold for Brazil," Revista Brasileira de Economia, Graduate School of Economics, Getulio Vargas Foundation (Brazil), vol. 64(3), pages 231-243, September.
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  15. Shintani, Mototsugu & Terada-Hagiwara, Akiko & Yabu, Tomoyoshi, 2013. "Exchange rate pass-through and inflation: A nonlinear time series analysis," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 512-527.
  16. Matthieu Bussiere, 2007. "Exchange rate pass-through to trade prices - the role of non-linearities and asymmetries," Working Paper Series 822, European Central Bank.
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Cited by:
  1. Ben Cheikh, Nidhaleddine, 2012. "Asymmetric exchange rate pass-through in the Euro area: New evidence from smooth transition models," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 6(39), pages 1-28.

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