Testing for Structural Breaks in Covariance: Exchange Rate Pass-Through in Canada
AbstractEmpirical studies looking for changes over time in exchange rate pass-through to consumer prices generally consider the context of a changing inflation mean to examine this issue. This paper allows for endogeneity in exchange rate movements and proposes a new method to test this hypothesis for Canada: A correlated VAR is proposed, and its covariance matrix is tested for breaks. For the latter purposes, we extend the test method proposed in Anderson(1971) to breaks in covariates and to unknown break dates. Our test accounts for breaks in mean, and is exact for fixed regressors. We find strong evidence of structural changes, and a decline over time in pass-through. Nevertheless, we also find that the covariance between Canadian inflation and exchange rates changes has actually increased in the recent period
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 376.
Date of creation: 11 Nov 2005
Date of revision:
pass-through; structural break test;
Find related papers by JEL classification:
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- F31 - International Economics - - International Finance - - - Foreign Exchange
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
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