Non-linearities in exchange rate pass-through: Evidence from smooth transition models

Nidhaleddine Ben Cheikh ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the presence of nonlinear mechanisms in the exchange rate pass-through (ERPT) to CPI inflation for 12 euro area (EA) countries. Using smooth transition models, we explore the existence of non-linearities with respect to three macroeconomic factors, namely inflation rate, exchange rate fluctuations and business cycle. Our results reveals that exchange rate transmission is higher when inflation rate surpass some threshold. We give a supportive evidence to the Taylor’s view that pass-through is decreasing in a lower and more stable inflation environment. Next, we check the asymmetry of pass-through with respect to both direction and magnitude of exchange rate. In one hand, results provide an asymmetrical ERPT to appreciations and depreciations, but there is no clear direction of asymmetry. In the other hand, the degree of pass-through is found to be higher for large exchange rate changes than for small ones. Finally, when we examine the non-linearities of ERPT relative to business cycle, we report that passthrough depends positively on economic activity; that is, when real GDP is growing above some threshold, the extent of ERPT becomes higher.

Keywords: Exchange Rate Pass-Through; Inflation; Smooth transition regression models; Euro area (search for similar items in EconPapers)
JEL-codes: C22 E31 F31 F41 (search for similar items in EconPapers)
Date: 2012-04
New Economics Papers: this item is included in nep-eec, nep-mac, nep-mon and nep-opm
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https://mpra.ub.uni-muenchen.de/39764/1/MPRA_paper_39764.pdf revised version (application/pdf)

Related works:
Journal Article: Non-linearities in exchange rate pass-through: Evidence from smooth transition models (2012)
Working Paper: Non-linearities in exchange rate pass-through: Evidence from smooth transition models (2012)
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