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

  • Ben Cheikh, Nidhaleddine

This paper examines the presence of nonlinear mechanisms in the exchange rate pass-through (ERPT) to CPI inflation for 12 euro area (EA) countries. Using smooth transition models, we explore the existence of non-linearities with respect to three macroeconomic factors, namely inflation rate, exchange rate fluctuations and business cycle. Our results reveals that exchange rate transmission is higher when inflation rate surpass some threshold. We give a supportive evidence to the Taylor’s view that pass-through is decreasing in a lower and more stable inflation environment. Next, we check the asymmetry of pass-through with respect to both direction and magnitude of exchange rate. In one hand, results provide an asymmetrical ERPT to appreciations and depreciations, but there is no clear direction of asymmetry. In the other hand, the degree of pass-through is found to be higher for large exchange rate changes than for small ones. Finally, when we examine the non-linearities of ERPT relative to business cycle, we report that passthrough depends positively on economic activity; that is, when real GDP is growing above some threshold, the extent of ERPT becomes higher.

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File URL: https://mpra.ub.uni-muenchen.de/39764/1/MPRA_paper_39764.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39258.

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Date of creation: Apr 2012
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Handle: RePEc:pra:mprapa:39258
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  1. Shintani, Mototsugu & Terada-Hagiwara, Akiko & Yabu, Tomoyoshi, 2013. "Exchange rate pass-through and inflation: A nonlinear time series analysis," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 512-527.
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  3. Arnildo da Silva Correa & André Minella, 2006. "Nonlinear Mechanisms of the Exchange Rate Pass-Through: a Phillips curve model with threshold for Brazil," Working Papers Series 122, Central Bank of Brazil, Research Department.
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  6. Bussière, Matthieu, 2007. "Exchange rate pass-through to trade prices: the role of non-linearities and asymmetries," Working Paper Series 0822, European Central Bank.
  7. Dalia Hakura & Ehsan U. Choudhri, 2001. "Exchange Rate Pass-Through to Domestic Prices; Does the Inflationary Environment Matter?," IMF Working Papers 01/194, International Monetary Fund.
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  11. Eitrheim, Oyvind & Terasvirta, Timo, 1996. "Testing the adequacy of smooth transition autoregressive models," Journal of Econometrics, Elsevier, vol. 74(1), pages 59-75, September.
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  13. Reginaldo P. Nogueira, Jr. & Miguel A. León-Ledesma, 2011. "Does exchange rate pass-through respond to measures of macroeconomic instability?," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 167-180, May.
  14. Jan Przystupa & Ewa Wróbel, 2011. "Asymmetry of the Exchange Rate Pass-Through," Eastern European Economics, M.E. Sharpe, Inc., vol. 49(1), pages 30-51, January.
  15. Marston, Richard C., 1990. "Pricing to market in Japanese manufacturing," Journal of International Economics, Elsevier, vol. 29(3-4), pages 217-236, November.
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  17. Reginaldo P. Nogueira Junior & Miguel Leon-Ledesma, 2008. "Exchange Rate Pass-Through Into Inflation: The Role of Asymmetries and NonLinearities," Studies in Economics 0801, School of Economics, University of Kent.
  18. Valerie Herzberg & George Kapetanios & Simon Price, 2003. "Import prices and exchange rate pass-through: theory and evidence from the United Kingdom," Bank of England working papers 182, Bank of England.
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