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Exchange Rate Pass-Through and Inflation: A Nonlinear Time Series Analysis

Listed author(s):
  • Mototsugu Shintani

    ()

    (Department of Economics, Vanderbilt University)

  • Akiko Terada-Hagiwara

    ()

    (Economics and Reasearch Department, Asian Development Bank)

  • Tomoyoshi Yabu

    ()

    (Faculty of Business and Commerce, Keio University)

This paper investigates the relationship between the exchange rate pass-through (ERPT) and inflation by estimating a nonlinear time series model. Using a simple theoretical model of ERPT determination, we show that the dynamics of ERPT can be well-approximated by a class of smooth transition autoregressive (STAR) models with inflation as a transition variable. We employ several U-shaped transition functions in the estimation of the time-varying ERPT to U.S. domestic prices. The estimation result suggests that declines in the ERPT during the 1980s and 1990s are associated with lowered inflation.

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File URL: http://www.accessecon.com/pubs/VUECON/vu09-w20.pdf
File Function: First version, 2009
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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0920.

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Date of creation: Nov 2009
Handle: RePEc:van:wpaper:0920
Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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  26. Peel, David & Sarno, Lucio & Taylor, Mark P, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Towards a Solution to the Purchasing Power Parity Puzzles," CEPR Discussion Papers 2658, C.E.P.R. Discussion Papers.
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