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Exchange Rate Pass-Through and Inflation: A Nonlinear Time Series Analysis

Author

Listed:
  • Mototsugu Shintani

    (Department of Economics, Vanderbilt University)

  • Akiko Terada-Hagiwara

    (Economics and Reasearch Department, Asian Development Bank)

  • Tomoyoshi Yabu

    (Faculty of Business and Commerce, Keio University)

Abstract

This paper investigates the relationship between the exchange rate pass-through (ERPT) and inflation by estimating a nonlinear time series model. Using 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 with inflation as a transition variable. We employ several U-shaped transition functions in the estimation of the time-varying ERPT to U.S. domestic prices. The estimation result suggests that declines in the ERPT during the 1980s and 1990s are associated with lowered inflation.

Suggested Citation

  • Mototsugu Shintani & Akiko Terada-Hagiwara & Tomoyoshi Yabu, 2009. "Exchange Rate Pass-Through and Inflation: A Nonlinear Time Series Analysis," Vanderbilt University Department of Economics Working Papers 0920, Vanderbilt University Department of Economics.
    • Handle: RePEc:van:wpaper:0920
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    References listed on IDEAS

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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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