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

  • Shintani, Mototsugu
  • Terada-Hagiwara, Akiko
  • Yabu, Tomoyoshi

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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File URL: http://www.sciencedirect.com/science/article/pii/S0261560612001337
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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 32 (2013)
Issue (Month): C ()
Pages: 512-527

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Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:512-527
DOI: 10.1016/j.jimonfin.2012.05.024
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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