The role of inflation regime in the exchange rate pass-through to import prices

Juha Junttila and Marko Korhonen

International Review of Economics & Finance, 2012, vol. 24, issue C, 88-96

Abstract: We examine exchange rate pass-through (ERPT) into aggregate import prices for nine OECD countries in view of Taylor's [Taylor, J., (2000). Low Inflation, Pass-through, and the Pricing Power of Firms, European Economic Review 44 (7), 1389–1408] suggestion that the degree of pass-through is dependent on the importing country inflation regime. Extending the standard mark-up pricing model under monopolistic competition to a setting where the pricing decision is dependent on the importing country inflation experience, we present strong empirical evidence for the inflation regime dependence of pass-through elasticities for the analyzed countries based on nonlinear estimation methodology. Our main result is that the pass-through is highly incomplete and positively correlated with the importing country inflation environment, when the empirical analysis is conducted using nonlinear threshold or smooth transition estimation techniques.

Keywords: Exchange rate pass-through; Nonlinearity; Import prices; Inflation regime (search for similar items in EconPapers)
JEL-codes: C22 E31 F31 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (25)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:24:y:2012:i:c:p:88-96

DOI: 10.1016/j.iref.2012.01.005

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