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Nonlinear Exchange Rate Pass-Through: The Role of National Debt

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  • Po-Chin Wu
  • Shiao-Yen Liu
  • Ming-Fang Yang

Abstract

This study uses the panel smooth transition regression model with a debt ratio as the transition variable to evaluate the level of exchange rate pass-through. This model can investigate the threshold effect of the debt ratio on the pass-through. To perform the empirical estimation, we choose the 22 Organization for Economic Co-operation and Development member countries during 1994–2013 as sample objects. The empirical results show that the exchange rate pass-through displays a nonlinear and smooth transition process, depending on each period of debt ratio of the export country in different regimes. That is, the pass-through is nonlinear and varies with time and across countries. The larger the debt ratio is, the lower the pass-through would be. The threshold for the pass-through to generate smooth regime switching is 36.62% of debt ratio.

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  • Po-Chin Wu & Shiao-Yen Liu & Ming-Fang Yang, 2017. "Nonlinear Exchange Rate Pass-Through: The Role of National Debt," Global Economic Review, Taylor & Francis Journals, vol. 46(1), pages 1-17, January.
    • Handle: RePEc:taf:glecrv:v:46:y:2017:i:1:p:1-17
    DOI: 10.1080/1226508X.2016.1254057
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