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Non-linearities in exchange rate pass-through: Evidence from smooth transition models

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  • Nidhaleddine Ben Cheikh

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper examines the presence of non-linear mechanism in the exchange rate pass-through (ERPT) to CPI inflation for 12 euro area (EA) countries. Using smooth transition regression (STR) model, we explore the existence of non-linearities with respect to the inflation environment. We find strong evidence that pass-through respond non-linearly to inflation level for 8 out of 12 EA countries, that is, the transmission of exchange rate is higher when inflation rate surpass some threshold. Our results provide a broad support to the hypothesis suggested by Taylor (2000) that ERPT is decreasing in a lower and more stable inflation environment.

Suggested Citation

  • Nidhaleddine Ben Cheikh, 2012. "Non-linearities in exchange rate pass-through: Evidence from smooth transition models," Post-Print halshs-00761018, HAL.
    • Handle: RePEc:hal:journl:halshs-00761018
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    More about this item

    Keywords

    Exchange rate pass-through; inflation; smooth transition regression models; Euro area;
    All these keywords.

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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