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Exchange Rate Pass-Through Into Inflation: The Role of Asymmetries and NonLinearities

Author

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  • Reginaldo P. Nogueira Junior
  • Miguel Leon-Ledesma

    ()

Abstract

This paper investigates the empirical evidence on exchange rate pass through (ERPT) into CPI inflation for a set of emerging and developed countries. We argue that, theoretically, ERPT may be nonlinear in contrast to standard linear estimates in the literature. We use smooth transition models to investigate several possible sources of these nonlinearities. The results suggest that, although the sources of nonlinearities vary considerably across countries, they appear to be important. We find that for four countries ERPT responds nonlinearly to inflation and for three of them it responds nonlinearly to the output gap. We also find an asymmetric response of ERPT with respect to the magnitude of exchange rate changes for only two out of six countries. Finally, for some emerging markets, ERPT seems to be affected nonlinearly by measures of macroeconomic instability.

Suggested Citation

  • 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.
  • Handle: RePEc:ukc:ukcedp:0801
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    Cited by:

    1. Delatte, Anne-Laure & López-Villavicencio, Antonia, 2012. "Asymmetric exchange rate pass-through: Evidence from major countries," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 833-844.
    2. Saha, Shrabani & Zhang, Zhaoyong, 2013. "Do exchange rates affect consumer prices? A comparative analysis for Australia, China and India," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 93(C), pages 128-138.
    3. Nidhaleddine Ben Cheikh & Christophe Rault, 2016. "The Role of the Business Cycle in Exchange Rate Pass-Through: The Case of Finland," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 14(1), pages 15-27, June.
    4. Nidhaleddine Ben Cheikh, 2012. "Non-linearities in exchange rate pass-through: Evidence from smooth transition models," Economics Bulletin, AccessEcon, vol. 32(3), pages 2530-2545.
    5. Hernán Rincón-Castro & Norberto Rodríguez-Niño, 2018. "Nonlinear state and shock dependence of exchange rate pass through on prices," BIS Working Papers 690, Bank for International Settlements.
    6. Hernán Rincón-Castro & Norberto Rodríguez-Niño, 2016. "Nonlinear Pass-Through of Exchange Rate Shocks on Inflation: A Bayesian Smooth Transition VAR Approach," Borradores de Economia 930, Banco de la Republica de Colombia.
    7. Oleksandr Faryna, 2016. "Nonlinear Exchange Rate Pass-Through to Domestic Prices in Ukraine," Visnyk of the National Bank of Ukraine, National Bank of Ukraine, Monetary Policy and Economic Analysis Department, issue 236, pages 30-42, June.
    8. Nidhaleddine Ben Cheikh, 2012. "Nonlinear Mechanism of the Exchange Rate Pass-Through: Does Business Cycle Matter?," Working Papers halshs-00731502, HAL.
    9. Ben Cheikh, Nidhaleddine, 2012. "Asymmetric exchange rate pass-through in the Euro area: New evidence from smooth transition models," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 6, pages 1-28.
    10. Suleyman Hilmi Kal & Ferhat Arslaner & Nuran Arslaner, 2015. "Sources of Asymmetry and Non-linearity in Pass-Through of Exchange Rate and Import Price to Consumer Price Inflation for the Turkish Economy during Inflation Targeting Regime," Working Papers 1530, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.

    More about this item

    Keywords

    Exchange rate pass-through; smooth transition regression models;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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