Exchange Rate Pass-Through Into Inflation: The Role of Asymmetries and NonLinearities

Reginaldo Nogueira and Miguel Leon-Ledesma

Studies in Economics from School of Economics, University of Kent

Abstract: This paper investigates the empirical evidence on exchange rate pass through (ERPT) into CPI inflation for a set of emerging and developed countries. We argue that, theoretically, ERPT may be nonlinear in contrast to standard linear estimates in the literature. We use smooth transition models to investigate several possible sources of these nonlinearities. The results suggest that, although the sources of nonlinearities vary considerably across countries, they appear to be important. We find that for four countries ERPT responds nonlinearly to inflation and for three of them it responds nonlinearly to the output gap. We also find an asymmetric response of ERPT with respect to the magnitude of exchange rate changes for only two out of six countries. Finally, for some emerging markets, ERPT seems to be affected nonlinearly by measures of macroeconomic instability.

Keywords: Exchange rate pass-through; smooth transition regression models (search for similar items in EconPapers)
JEL-codes: E31 E52 F41 (search for similar items in EconPapers)
Date: 2008-01
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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