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Exchange-rate pass-through to import prices: nonlinearities and exchange rate and inflationary regimes

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  • Rehim Kýlýc

    () (Koc University)

Abstract

This paper investigates the relationship between exchange rate pass-through and exchange rate appreciations/depreciations and inflation by estimating nonlinear time series models. Motivated by theoretical and empirical results in the literature, the paper proposes new econometric models that can characterize nonlinear and asymmetric dynamics between import prices and exchange rate changes in a parsimonious fashion. Findings show the presence of complete and incomplete pass-through regimes depending upon the magnitude of appreciations of a currency and inflation rates both in the short-run and in the long-run. Results also reveal threshold effects and asymmetry in the pass-through relationship over appreciations/depreciations as well as inflationary and disinflationary periods. Findings have important macroeconomic policy implications.

Suggested Citation

  • Rehim Kýlýc, 2010. "Exchange-rate pass-through to import prices: nonlinearities and exchange rate and inflationary regimes," Koç University-TUSIAD Economic Research Forum Working Papers 1033, Koc University-TUSIAD Economic Research Forum.
  • Handle: RePEc:koc:wpaper:1033
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    File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1033.pdf
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    References listed on IDEAS

    as
    1. Eitrheim, Oyvind & Terasvirta, Timo, 1996. "Testing the adequacy of smooth transition autoregressive models," Journal of Econometrics, Elsevier, vol. 74(1), pages 59-75, September.
    2. Andrew Atkeson & Ariel Burstein, 2008. "Pricing-to-Market, Trade Costs, and International Relative Prices," American Economic Review, American Economic Association, vol. 98(5), pages 1998-2031, December.
    3. Gust, Christopher & Leduc, Sylvain & Vigfusson, Robert, 2010. "Trade integration, competition, and the decline in exchange-rate pass-through," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 309-324, April.
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    Keywords

    Conditional CAPM;

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