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Exchange rate pass-through and inflation: a nonlinear time series analysis

Author

Listed:
  • Mototsugu Shintani

    (Deaprtment of Economics, Vanderbilt University)

  • Akiko Terada-Hagiwara

    (Economics and Research Department, Asian Development Bank)

  • Tomoyoshi Yabu

    (Faculty of Business and Commerce, Keio University)

Abstract

This paper investigates the relationship between the exchange rate pass-through (ERPT) and inflation by estimating a nonlinear time series model. Based on a simple theoretical model of ERPT determination, we show that the dynamics of ERPT can be well approximated by a class of smooth transition autoregressive (STAR) models using the past inflation rate as a transition variable. We employ several U-shaped transition functions in the estimation of the time-varying ERPT to US domestic prices. The estimation result suggests that declines in the ERPT during the 1980s and 1990s are associated with lowered inflation.

Suggested Citation

  • Mototsugu Shintani & Akiko Terada-Hagiwara & Tomoyoshi Yabu, 2012. "Exchange rate pass-through and inflation: a nonlinear time series analysis," Vanderbilt University Department of Economics Working Papers 12-00008, Vanderbilt University Department of Economics.
    • Handle: RePEc:van:wpaper:vuecon-12-00008
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    References listed on IDEAS

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    Keywords

    import prices; inflation indexation; pricing-to-market; smooth transition autoregressive models; sticky prices.;
    All these keywords.

    JEL classification:

    • N0 - Economic History - - General

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