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

Author

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  • Shintani, Mototsugu
  • Terada-Hagiwara, Akiko
  • Yabu, Tomoyoshi
Abstract
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.

Suggested Citation

  • Shintani, Mototsugu & Terada-Hagiwara, Akiko & Yabu, Tomoyoshi, 2013. "Exchange rate pass-through and inflation: A nonlinear time series analysis," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 512-527.
    • Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:512-527
    DOI: 10.1016/j.jimonfin.2012.05.024
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    More about this item

    Keywords

    Import prices; Inflation indexation; Pricing-to-market; Smooth transition autoregressive models; Sticky prices;
    All these keywords.

    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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