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The Role of the Business Cycle in Exchange Rate Pass-Through: The Case of Finland

Author

Listed:
  • Nidhaleddine Ben Cheikh

    (ESSCA School of Management)

  • Christophe Rault

    (LEO (UMR CNRS 7322), University of Orléans
    IZA
    CESifo)

Abstract

In this paper we investigate whether exchange rate pass-through (ERPT) responds nonlinearly to economic activity along the business cycle. Using quarterly data spanning the period 1975:1 to 2011:1, we explore the existence of nonlinearities in ERPT to CPI inflation for the Finnish economy. Within a logistic smooth transition framework, our investigations reveal a strong regime-dependence of pass-through, depending positively on economic activity. Besides, point estimates indicate that the long-run pass-through coefficient is equal to 0.15 % (weakly significant) when GDP growth is below a threshold of 3 %. However, when the Finnish economy’s growth rate speeds up—above the threshold of 3 %—ERPT elasticity increases to 0.47 %. These results provide some useful guidance on how policymakers should act over different phases of the business cycle. More specifically, monetary policy should factor in the nonlinear mechanism of ERPT over the business cycle in order to prevent exchange rate movements from fueling a continuous inflationary process.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:jqecon:v:14:y:2016:i:1:d:10.1007_s40953-015-0025-0
    DOI: 10.1007/s40953-015-0025-0
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    Cited by:

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    3. 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.
    4. Suleyman Hilmi Kal & Ferhat Arslaner & Nuran Arslaner, 2015. "Sources of Asymmetry and Non-linearity in Pass-Through of Exchange Rate and Import Price to Consumer Price Inflation for the Turkish Economy during Inflation Targeting Regime," Working Papers 1530, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    5. Ben Cheikh, Nidhaleddine & Ben Zaied, Younes, 2020. "Revisiting the pass-through of exchange rate in the transition economies: New evidence from new EU member states," Journal of International Money and Finance, Elsevier, vol. 100(C).
    6. Nidhaleddine Ben Cheikh & Younes Ben Zaied & Pascal Nguyen, 2018. "Nonlinear Exchange Rate Transmission in the Euro Area: A Multivariate Smooth Transition Regression Approach," Economics Bulletin, AccessEcon, vol. 38(3), pages 1590-1602.
    7. Baharumshah, Ahmad Zubaidi & Soon, Siew-Voon & Wohar, Mark E., 2017. "Markov-switching analysis of exchange rate pass-through: Perspective from Asian countries," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 245-257.

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    More about this item

    Keywords

    Exchange rate pass-through; Inflation; Business cycle; Smooth transition regression models;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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