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The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis

  • Nidhaleddine Ben Cheikh

This paper investigates whether the exchange rate pass-through (ERPT) to CPI inflation is a nonlinear phenomenon for five heavily indebted euro area (EA) countries, namely the so-called GIIPS group (Greece, Ireland, Italy, Portugal, and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus German) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, i.e. when sovereign bond yield spreads exceed some threshold. For all the GIIPS countries, we reveal that the increasing of macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed a higher sensibility of CPI inflation to exchange rate movements.

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Paper provided by FIW in its series FIW Working Paper series with number 123.

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Length: 25
Date of creation: Jun 2013
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Handle: RePEc:wsr:wpaper:y:2013:i:123
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  17. Ben Cheikh, Nidhaleddine, 2011. "Long run exchange rate pass-through: Evidence from new panel data techniques," MPRA Paper 39663, University Library of Munich, Germany.
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  22. Nidhaleddine Ben Cheikh & Waël Louhichi, 2014. "Revisiting the Role of Inflation Environment in the Exchange Rate Pass-Through: A Panel Threshold Approach," FIW Working Paper series 132, FIW.
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