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The Role of the Business Cycle in Exchange Rate Pass-Through: The Case of Finland

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  • Nidhaleddine Ben Cheikh
  • Christophe Rault

    ()

Abstract

In this paper we investigate whether exchange rate pass-through (ERPT) responds nonlinearly to economic activity along the business cycle. Using quarterly data spanning the period 1975:1 to 2011:1, we explore the existence of nonlinearities in ERPT to CPI inflation for the Finnish economy. Within a logistic smooth transition framework, our investigations reveal a strong regime-dependence of pass-through, depending positively on economic activity. Besides, point estimates indicate that the long-run pass-through coefficient is equal to 0.15% (weakly significant) when GDP growth is below a threshold of 3%. However, when the Finnish economy???s growth rate speeds up - above the threshold of 3% - ERPT elasticity increases to 0.47%. These results provide some useful guidance on how policymakers should act over different phases of the business cycle. More specifically, monetary policy should factor in the nonlinear mechanism of ERPT over the business cycle in order to prevent exchange rate movements from fueling a continuous inflationary process.

Suggested Citation

  • Nidhaleddine Ben Cheikh & Christophe Rault, 2014. "The Role of the Business Cycle in Exchange Rate Pass-Through: The Case of Finland," William Davidson Institute Working Papers Series wp1078, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:2014-1078
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    1. repec:bla:jorssa:v:180:y:2017:i:2:p:587-612 is not listed on IDEAS
    2. Raphael Brun-Aguerre & Ana-Maria Fuertes & Matthew Greenwood-Nimmo, 2017. "Heads I win; tails you lose: asymmetry in exchange rate pass-through into import prices," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 180(2), pages 587-612, February.
    3. repec:gam:jecomi:v:7:y:2019:i:1:p:11-:d:205000 is not listed on IDEAS
    4. repec:eee:reveco:v:51:y:2017:i:c:p:245-257 is not listed on IDEAS
    5. repec:ebl:ecbull:eb-18-00270 is not listed on IDEAS

    More about this item

    Keywords

    Exchange rate pass-through; Inflation; Business cycle; Smooth Transition Regression models;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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