Asymmetry and non-linearity in exchange rate pass-through: Evidence from scanner data

Using retail scanner data from Kazakhstan, an emerging economy with significant and un-expected exchange rate fluctuations, we observe an incomplete yet substantial exchange rate pass-through (ERPT) into prices. Specifically, we note a 50% change occurring a year after the initial shock. The ERPT demonstrates asymmetry in response to exchange rate movements. Notably, the direction of this asymmetry is opposite for imported versus domestic products. Furthermore, our findings indicate that ERPT is non-linear; the price response is more pro-nounced when the exchange shock is small, aligning with the existence of menu costs. Our results also reveal that larger retailers exhibit a greater ERPT compared to smaller or medium-sized retailers, regardless of the exchange rate shock direction. Understanding these asymmetric and non-linear price responses to exchange rate shocks may be crucial for formulating effective inflation targeting policies, especially in emerging economies prone to high inflation.