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Revisiting the Role of Inflation Environment in the Exchange Rate Pass-Through: A Panel Threshold Approach

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  • Nidhaleddine Ben Cheikh
  • Waël Louhichi

Abstract

This paper sheds new light on the role of inflation regime in explaining the extent of exchange rate pass-through (ERPT) into import prices. In order to classify his sample of 24 developing countries by regimes of inflation, Barhoumi [(2006), “Differences in long run exchange rate pass-through into import prices in developing countries: An empirical investigation”, Economic Modeling, 23 (6), 926-951.] chose an arbitrary threshold of 10% to split sample between high and low inflation regimes. For more accuracy, our study proposes to use a panel threshold framework where a grid search is used to select the appropriate threshold value. In a larger panel-data set including 63 countries over the period 1992-2012, we find that there are two thresholds points that are well identified by the data, allowing us to split our sample into three inflation regimes. When estimating the ERPT for each group of countries, we point out a strong regime-dependence of pass-through to inflation environment, that is, the class of countries with higher inflation rates experiences the higher degree of ERPT.

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Bibliographic Info

Paper provided by FIW in its series FIW Working Paper series with number 132.

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Length: 15
Date of creation: Jun 2014
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Handle: RePEc:wsr:wpaper:y:2014:i:132

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Keywords: Exchange Rate Pass - Through; Import Prices; Panel Threshold;

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  1. Shintani, Mototsugu & Terada-Hagiwara, Akiko & Yabu, Tomoyoshi, 2013. "Exchange rate pass-through and inflation: A nonlinear time series analysis," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 512-527.
  2. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
  3. Nidhaleddine Ben Cheikh, 2012. "Non-linearities in exchange rate pass-through: Evidence from smooth transition models," Economics Bulletin, AccessEcon, vol. 32(3), pages 2530-2545.
  4. Westerlund, Joakim, 2005. "Testing for Error Correction in Panel Data," Working Papers 2005:11, Lund University, Department of Economics.
  5. Campa, José Manuel & Goldberg, Linda S, 2004. "Exchange Rate Pass-Through into Import Prices," CEPR Discussion Papers 4391, C.E.P.R. Discussion Papers.
  6. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
  7. Barhoumi, Karim, 2006. "Differences in long run exchange rate pass-through into import prices in developing countries: An empirical investigation," Economic Modelling, Elsevier, vol. 23(6), pages 926-951, December.
  8. Jeannine Bailliu & Eiji Fujii, 2004. "Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation," Working Papers 04-21, Bank of Canada.
  9. Giovanni P. Olivei, 2002. "Exchange rates and the prices of manufacturing products imported into the United States," New England Economic Review, Federal Reserve Bank of Boston, issue Q 1, pages 3 - 18.
  10. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
  11. Choudhri, Ehsan U. & Hakura, Dalia S., 2006. "Exchange rate pass-through to domestic prices: Does the inflationary environment matter?," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 614-639, June.
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