Local/import – and foreign currency prices: inflation, uncertainty and pass through endogeneity

Herwartz Helmut and Roestel Jan ()
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Herwartz Helmut: Department of Economics, Georg-August-Universität Göttingen, Humboldtallee 3, D-37073 Göttingen, Germany
Roestel Jan: Institut für Statistik und Ökonometrie, Christian–Albrechts–Universität zu Kiel, Olshausenstr. 40, D-24098 Kiel, Germany

Studies in Nonlinear Dynamics & Econometrics, 2018, vol. 22, issue 3, 17

Abstract: We investigate first and second order moment interactions among import prices (IPs), local currency prices (LCPs) and producer currency prices (PCPs) for 20 (mostly) developed economies and a time period of 3 decades. We test various hypotheses on both linear and non-linear effects put forth in the literature on the endogeneity of exchange rate pass through to monetary policy. It turns out that PCP shocks give rise to IP uncertainty in a sizeable manner, while the further propagation of IP uncertainty to LCP inflation uncertainty is moderate. Moreover, LCP inflation uncertainty increases the uncertainty of IP inflation (measured in local currency). In general, both inflation and its uncertainty are diagnosed as core determinants of pass through variation. Thus, a lack of monetary credibility could serve as a catalyst for the import of foreign price pressures and uncertainty to local prices.

Keywords: Endogenous currency of price setting; exchange rate pass through; inflation uncertainty; nominal rigidities; multivariate GARCH (search for similar items in EconPapers)
JEL-codes: C3 E5 F4 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1515/snde-2016-0092

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