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Exchange rate pass-through and inflation: a nonlinear time series analysis

  • Mototsugu Shintani

    ()

    (Deaprtment of Economics, Vanderbilt University)

  • Akiko Terada-Hagiwara

    ()

    (Economics and Research 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. Based on 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 using the past inflation rate as a transition variable. We employ several U-shaped transition functions in the estimation of the time-varying ERPT to US 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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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 12-00008.

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Date of creation: 09 May 2012
Handle: RePEc:van:wpaper:vuecon-12-00008
Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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