Asymmetric Exchange Rate Pass-through: Evidence from the Philippines

Exchange rate pass-through (ERPT) measures the effect on inflation of the changes in the exchange rate. In contrast to the relative richness of available literature on ERPT, more recent studies that explore possible asymmetric and non-linear characteristic of ERPT especially in the Philippines are not yet available. Exchange rate pass-through coefficients generated from linear modelling techniques may be imprecise but not implausible. Thus, this paper examines whether the response of inflation is asymmetric across depreciation and appreciation episodes. The study finds evidence of asymmetry in the exchange rate pass-through to inflation rate during the IT period. The dynamic simulations show that the directional impact on inflation is symmetrical, with appreciation having milder effect at low levels of exchange rate shocks. This may suggest that with appreciation under normal conditions, prices may be slower to adjust and hence, higher mark-up accrues to producers. As the shocks become bigger, however, depreciation episodes become more pronounced. This implies that exchange rate developments, particularly depreciation episodes, bear close monitoring as the risk of inflation creep is amplified.