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Long Run Exchange Rate Pass-Through: Evidence from New Panel Data Techniques

  • Nidhaleddine Ben Cheikh

    (University of Rennes 1 - CREM (UMR 6211 CNRS))

This paper examines the exchange rate pass-through (ERPT) into import prices using recent panel data techniques. For a sample of 27 OECD countries, panel cointegration tests provide an evidence for the existence of long-run equilibrium relationship in pass-through equation. Following Pedroni (2001), we employ both FM-OLS and DOLS estimators and show that long-run ERPT elasticity does not exceed 0.70%. Individual estimates of ERPT are heterogeneous across 27 OECD countries, ranging from 0.23% in France to 0.98% in Poland. When we look for the macroeconomic determinants of this long-run heterogeneity, we implement a panel threshold methodology as introduced by Hansen (2000). Our results indicate a regime-dependence of ERPT, that is, countries with higher inflation regime and more exchange rate volatility would experience a higher degree of pass-through.

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Paper provided by Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS in its series Economics Working Paper Archive (University of Rennes 1 & University of Caen) with number 201225.

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Date of creation: Jun 2012
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Handle: RePEc:tut:cremwp:201225
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  1. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?," NBER Working Papers 8934, National Bureau of Economic Research, Inc.
  2. Mark J. Holmes, 2006. "Is a Low-inflation Environment Associated with Reduced Exchange Rate Pass Through?," Finnish Economic Papers, Finnish Economic Association, vol. 19(2), pages 58-68, Autumn.
  3. Menon, Jayant, 1995. " Exchange Rate Pass-Through," Journal of Economic Surveys, Wiley Blackwell, vol. 9(2), pages 197-231, June.
  4. de Bandt, Olivier & Banerjee, Anindya & Kozluk, Tomasz, 2007. "Measuring Long-Run Exchange Rate Pass-Through," Economics Discussion Papers 2007-32, Kiel Institute for the World Economy.
  5. J. McCarthy, 1999. "Pass-through of exchange rates and import prices to domestic inflation in some industrialised economies," BIS Working Papers 79, Bank for International Settlements.
  6. Barhoumi, Karim, 2006. "Differences in long run exchange rate pass-through into import prices in developing countries: An empirical investigation," Economic Modelling, Elsevier, vol. 23(6), pages 926-951, December.
  7. Eiji Fuji & Jeannine Bailliu, 2004. "Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation," Computing in Economics and Finance 2004 135, Society for Computational Economics.
  8. 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.
  9. barhoumi karim, 2004. "Exchange Rate Pass-Through Into Import Prices In Developing Countries: An Empirical Investigation," Economics Bulletin, AccessEcon, vol. 28(10), pages A0.
  10. repec:ebl:ecbull:v:3:y:2005:i:26:p:1-14 is not listed on IDEAS
  11. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(03), pages 597-625, June.
  12. Mark J. Holmes, 2008. "Long-Run Pass-Through From The Exchange Rate To Import Prices In African Countries," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 33(1), pages 97-111, June.
  13. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
  14. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
  15. Hansen, Bruce E., 1999. "Threshold effects in non-dynamic panels: Estimation, testing, and inference," Journal of Econometrics, Elsevier, vol. 93(2), pages 345-368, December.
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