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Nonlinear exchange rate pass-through in industrial economies

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  • Paul Turner
  • Justine Wood

Abstract

This article presents theoretical arguments for a nonlinear pass-through relationship for import and export prices and investigates the relationship empirically. The theoretical argument is based on the menu-cost approach in which small absolute changes in exchange rates may not prompt price changes because the costs of doing so exceed the extra profits generated for firms involved in international trade. This relationship is investigated empirically using quarterly data for the period 1979q1-2015q1 for a sample of 17 countries. In the case of import prices, evidence is found of nonlinear adjustment consistent with the theoretical model in 4 out of 17 cases. In the case of export prices, such a relationship is only evident for two economies in the sample. However, for both the import and export price cases, a significant positive nonlinear relationship is found for the two largest economies in the sample, i.e. the United States and Japan.

Suggested Citation

  • Paul Turner & Justine Wood, 2017. "Nonlinear exchange rate pass-through in industrial economies," Applied Economics, Taylor & Francis Journals, vol. 49(4), pages 397-402, January.
    • Handle: RePEc:taf:applec:v:49:y:2017:i:4:p:397-402
    DOI: 10.1080/00036846.2016.1197374
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    Cited by:

    1. Boris Blagov, 2019. "Exchange rate uncertainty and import prices in the euro area," Review of International Economics, Wiley Blackwell, vol. 27(5), pages 1537-1572, November.
    2. Mohamed Ali Chroufa & Nouri Chtourou, 2023. "Asymmetric relationship between exchange rate and inflation in Tunisia: fresh evidence from multiple-threshold NARDL model and Granger quantile causality," SN Business & Economics, Springer, vol. 3(7), pages 1-21, July.

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