Exchange rate pass-through in deflation: The case of Taiwan

Po-Chun Lin and Chung-Shu Wu

International Review of Economics & Finance, 2012, vol. 22, issue 1, 101-111

Abstract: This paper incorporates deflation in an analysis of the relationship between the exchange rate pass-through and inflation. Using a nonlinear model based on monthly data of Taiwan's import prices from 1981 to 2008, we find that the degree of exchange rate pass-through is increasing in deflation. The increase becomes smaller when the price of oil is excluded. Evidence for pass-through increasing in deflation has not previously been found in the existing literature and presents a new understanding of the pricing behavior of firms. Poor profits in deflation cause firms to pass through most of the cost of exchange rate changes to their products to avoid exiting the market.

Keywords: Exchange rate pass-through; Threshold autoregressive; Deflation (search for similar items in EconPapers)
JEL-codes: E31 E52 F41 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:22:y:2012:i:1:p:101-111

DOI: 10.1016/j.iref.2011.10.010

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