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Nonlinear mechanism of the exchange rate pass-through: Does business cycle matter?

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  • Ben Cheikh, Nidhaleddine

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 reveal that pass-through 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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File URL: http://mpra.ub.uni-muenchen.de/41271/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 41179.

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Date of creation: Sep 2012
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Handle: RePEc:pra:mprapa:41179

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

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  1. 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, Bank of England 182, Bank of England.
  2. van Dijk, D.J.C. & Terasvirta, T. & Franses, Ph.H.B.F., 2000. "Smooth transition autoregressive models - A survey of recent developments," Econometric Institute Research Papers, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute EI 2000-23/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  3. Mototsugu Shintani & Akiko Terada-Hagiwara & Tomoyoshi Yabu, 2009. "Exchange Rate Pass-Through and Inflation: A Nonlinear Time Series Analysis," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 0920, Vanderbilt University Department of Economics.
  4. 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.
  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. Eitrheim, Øyvind & Teräsvirta, Timo, 1995. "Testing the Adequacy of Smooth Transition Autoregressive Models," Working Paper Series in Economics and Finance, Stockholm School of Economics 56, Stockholm School of Economics.
  7. 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, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 64(3), pages 231-243, September.
  8. Jeannine Bailliu & Eiji Fujii, 2004. "Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation," Working Papers, Bank of Canada 04-21, Bank of Canada.
  9. .De Bandt, O. & Banerjee, A. & Kozluk, T., 2007. "Measuring Long-Run Exchange Rate Pass-Through," Working papers, Banque de France 173, Banque de France.
  10. 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.
  11. 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.
  12. 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.
  13. 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.).
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