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

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  • 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.

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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 12-00008.

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Date of creation: 09 May 2012
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Handle: RePEc:van:wpaper:vuecon-12-00008

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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Keywords: import prices; inflation indexation; pricing-to-market; smooth transition autoregressive models; sticky prices.;

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References

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  1. Romer, David, 1990. "Staggered price setting with endogenous frequency of adjustment," Economics Letters, Elsevier, Elsevier, vol. 32(3), pages 205-210, March.
  2. Charles Engel, 2005. "Equivalence Results for Optimal Pass-Through, Optimal Indexing to Exchange Rates, and Optimal Choice of Currency for Export Pricing," NBER Working Papers 11209, National Bureau of Economic Research, Inc.
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  15. Dick van Dijk & Timo Terasvirta & Philip Hans Franses, 2002. "Smooth Transition Autoregressive Models — A Survey Of Recent Developments," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 21(1), pages 1-47.
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Citations

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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.
  2. Nidhaleddine Ben Cheikh & Waël Louhichi, 2014. "Revisiting the Role of Inflation Environment in the Exchange Rate Pass-Through: A Panel Threshold Approach," FIW Working Paper series, FIW 132, FIW.
  3. Ben Cheikh, Nidhaleddine, 2012. "Nonlinear mechanism of the exchange rate pass-through: Does business cycle matter?," MPRA Paper 41179, University Library of Munich, Germany.
  4. Naz, Farah & Mohsin, Asma & Zaman, Khalid, 2012. "Exchange rate pass-through in to inflation: New insights in to the cointegration relationship from Pakistan," Economic Modelling, Elsevier, Elsevier, vol. 29(6), pages 2205-2221.
  5. Ben Cheikh, Nidhaleddine, 2012. "Non-linearities in exchange rate pass-through: Evidence from smooth transition models," MPRA Paper 39258, University Library of Munich, Germany.
  6. Daniels, Joseph P & VanHoose, David D, 2010. "Exchange-Rate Pass Through, Openness, and the Sacrifice Ratio," Working Papers and Research, Marquette University, Center for Global and Economic Studies and Department of Economics 2010-05, Marquette University, Center for Global and Economic Studies and Department of Economics.
  7. Murase, Koichi, 2013. "Asymmetric effects of the exchange rate on domestic corporate goods prices," Japan and the World Economy, Elsevier, Elsevier, vol. 25, pages 80-89.
  8. Atsushi Sekine & Takayuki Tsuruga, 2014. "Effects of Commodity Price Shocks on Inflation: A Cross Country Analysis," Discussion papers e-13-006, Graduate School of Economics Project Center, Kyoto University.
  9. Nidhaleddine Ben Cheikh, 2013. "The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis," FIW Working Paper series, FIW 123, FIW.
  10. Miguel A. León-Ledesma & Reginaldo P. Nogueira Júnior, 2010. "Is low inflation really causing the decline in exchange rate pass-through?," Studies in Economics, Department of Economics, University of Kent 1002, Department of Economics, University of Kent.
  11. Herger Nils, 2013. "Market Entries and Exits and the Nonlinear Behaviour of the Exchange Rate Pass-Through into Import Prices," Working Papers 13.08, Swiss National Bank, Study Center Gerzensee.

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