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Threshold Model of the Exchange Rate Pass-Through Effect

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  • Josip Tica
  • Petra Posedel

Abstract

This paper investigates the exchange rate pass-through (ERPT) effect in Croatia using a threshold model. To date, empirical studies have failed to find a high degree of ERPT in Croatia, even though exchange rate stability has been one of the goals of monetary policy throughout the transition period. Using a nonlinear model, this study demonstrates that ERPT is present in the data and shows why it cannot be detected with a linear model. According to our estimates, there is a threshold at 5.91 percent of the monthly growth rate of the nominal exchange rate of the German mark (euro), with the 95 percent interval between about 2.7 and 21.8 percent. Consistent with the theories of sticky prices or pricing to market, ERPT is asymmetric around the threshold: below it, the ERPT effect is weak or statistically insignificant, and above it, the effect is strong and significant.

Suggested Citation

  • Josip Tica & Petra Posedel, 2009. "Threshold Model of the Exchange Rate Pass-Through Effect," Eastern European Economics, Taylor & Francis Journals, vol. 47(6), pages 43-59, November.
    • Handle: RePEc:mes:eaeuec:v:47:y:2009:i:6:p:43-59
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    Cited by:

    1. Tomislav Globan & Vladimir Arčabić & Petar Sorić, 2016. "Inflation in New EU Member States: A Domestically or Externally Driven Phenomenon?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(1), pages 154-168, January.
    2. Raphael Brun-Aguerre & Ana-Maria Fuertes & Matthew Greenwood-Nimmo, 2017. "Heads I win; tails you lose: asymmetry in exchange rate pass-through into import prices," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 180(2), pages 587-612, February.
    3. Kurtović Safet & Šehić-Kršlak Sabina & Halili Blerim & Maxhuni Nehat, 2018. "Exchange Rate Pass-Through into Import Prices of Croatia," Naše gospodarstvo/Our economy, Sciendo, vol. 64(4), pages 60-73, December.
    4. Lin, Po-Chun & Wu, Chung-Shu, 2012. "Exchange rate pass-through in deflation: The case of Taiwan," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 101-111.
    5. Meryem Türel & Ayhan Orhan, 2022. "Asymmetries in Exchange Rate Pass-through in Turkey: A Threshold VAR Analysis," Prague Economic Papers, Prague University of Economics and Business, vol. 2022(3-4), pages 276-295.

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