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Does exchange rate pass-through respond to measures of macroeconomic instability?

Author

Listed:
  • Reginaldo P. Nogueira, Jr.

    (IBMEC-MG)

  • Miguel A. León-Ledesma

    (University of Kent at Canterbury)

Abstract

We argue that, theoretically, exchange rate pass-through (ERPT) into consumer prices may be nonlinear in contrast to standard linear estimates found in the literature. ERPT can be higher in periods of financial or confidence crises, when firms have no incentive to absorb cost increases in their margins. We test this hypothesis applying a logistic smooth transition (LSTR) model to Mexican data. Using two different measures of macroeconomic instability as transition variables, we find that ERPT does seem to increase in periods of macroeconomic distress, which highlights the importance of a stable macroeconomic environment in reducing ERPT in emerging markets.

Suggested Citation

  • Reginaldo P. Nogueira, Jr. & Miguel A. León-Ledesma, 2011. "Does exchange rate pass-through respond to measures of macroeconomic instability?," Journal of Applied Economics, Universidad del CEMA, vol. 14, pages 167-180, May.
  • Handle: RePEc:cem:jaecon:v:14:y:2011:n:1:p:167-180
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    Citations

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    Cited by:

    1. Nidhaleddine Ben Cheikh & Christophe Rault, 2016. "The Role of the Business Cycle in Exchange Rate Pass-Through: The Case of Finland," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 14(1), pages 15-27, June.
    2. Aleem, Abdul & Lahiani, Amine, 2014. "A threshold vector autoregression model of exchange rate pass-through in Mexico," Research in International Business and Finance, Elsevier, vol. 30(C), pages 24-33.
    3. García-Solanes, José & Torrejón-Flores, Fernando, 2015. "Exchange-rate variations and the rate of inflation in emerging economies," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), August.
    4. 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.
    5. Reginaldo Pinto Nogueira, Jr., 2014. "A causality test of inflation environment and lower exchange rate pass-through," Economics Bulletin, AccessEcon, vol. 34(3), pages 1679-1686.
    6. Nidhaleddine Ben Cheikh & Christophe Rault, 2016. "The Pass‐through of Exchange Rate in the Context of the European Sovereign Debt Crisis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 21(2), pages 154-166, April.
    7. Felipe Santos Tostes & Helder Ferreira De Mendonça, 2016. "Credibility On Pass-Through In Brazil," Anais do XLII Encontro Nacional de Economia [Proceedings of the 42ndd Brazilian Economics Meeting] 022, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    8. Oleksandr Faryna, 2016. "Nonlinear Exchange Rate Pass-Through to Domestic Prices in Ukraine," Visnyk of the National Bank of Ukraine, National Bank of Ukraine, Monetary Policy and Economic Analysis Department, issue 236, pages 30-42, June.
    9. repec:eee:reveco:v:50:y:2017:i:c:p:196-244 is not listed on IDEAS
    10. Fatma Marrakchi Charfi & Mohamed Kadria, 2016. "Incomplete Exchange Rate Pass-Through Transmission To Prices: An Svar Model For Tunisia," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 11(04), pages 1-23, December.
    11. repec:bla:jorssa:v:180:y:2017:i:2:p:587-612 is not listed on IDEAS
    12. Goodwin, Barry K. & Holt, Matthew T. & Prestemon, Jeffrey P., 2012. "Nonlinear exchange rate pass-through in timber products: the case of oriented strand board in Canada and the United States," MPRA Paper 40834, University Library of Munich, Germany.
    13. Ilyas Siklar & Taner Sekmen, 2015. "Fear of Floating in Turkey," Business and Economic Research, Macrothink Institute, vol. 5(2), pages 288-307, December.
    14. Raphael, Brun-Aguerre & Ana-Maria, Fuertes & Matthew, Greenwood-Nimmo, 2016. "Heads I Win, Tails You Lose: Asymmetry in Exchange Rate Pass-Through Into Import Prices," MPRA Paper 71764, University Library of Munich, Germany.
    15. Junttila, Juha & Korhonen, Marko, 2012. "The role of inflation regime in the exchange rate pass-through to import prices," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 88-96.
    16. Helder Mendonça & Felipe Tostes, 2015. "The Effect of Monetary and Fiscal Credibility on Exchange Rate Pass-Through in an Emerging Economy," Open Economies Review, Springer, vol. 26(4), pages 787-816, September.
    17. repec:eee:reveco:v:51:y:2017:i:c:p:245-257 is not listed on IDEAS
    18. Byrne, Joseph P. & Kortava, Ekaterina & MacDonald, Ronald, 2013. "A new approach to tests of pricing-to-market," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 654-667.

    More about this item

    Keywords

    exchange rate pass-through; smooth transition regression models; emerging markets;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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