Can inaction account for the incomplete exchangerate pass-through? Evidence from threshold ARDL model

Karolina Konopczak ()
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Karolina Konopczak: Ministry of Finance in Poland, Postal: ul. Świętokrzyska 12, 00-916 Warszawa, https://www.gov.pl/web/finanse

No 37, MF Working Papers from Ministry of Finance in Poland

Abstract: Numerous empirical studies suggest that the responses of prices to exchange rate movements are muted, i.e. the exchange rate pass-through is incomplete. In this study we investigate whether this result can be explained by inaction to small changes in the exchange rate, in which case the incompleteness would constitute merely an artefact introduced by the linear specification of the pass-through equation. To this end we extend the non-linear ARDL framework of Shin et al. (2014) by allowing for threshold reactions, specifically in the form of a ‘band of inaction’. The results obtained for Polish industry show significant sign- and size-dependence in the sensitivity of export prices to exchange rate movements, but only in a few cases they fully account for the incompleteness of the pass-through. The tendency for inaction is to a large extent determined by industry’s characteristics, with sectors more technologically advanced and more involved in international activities, more willing or able to absorb exchange rate movements in their markups, thereby stabilising their prices in the destination markets.

Keywords: exchange rate pass-through; non-linear cointegration; non-linear ARDL; band of inaction (search for similar items in EconPapers)
JEL-codes: C32 E31 F14 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2019-05-29
New Economics Papers: this item is included in nep-mac and nep-opm
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:mfplwp:0037

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