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Time-varying nature and macroeconomic determinants of exchange rate pass-through

Ibrahim Ozkan and Lutfi Erden

International Review of Economics & Finance, 2015, vol. 38, issue C, 56-66

Abstract: The objectives of this study are two-fold: i) to derive time-varying exchange rate pass-through (ERPT) degree and ii) investigate the macroeconomic determinants of the degree of ERPT. For this purpose, the study adopts a distinct methodology combining Dynamic Conditional Correlation-Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) and panel threshold regression analyses. The data from a large sample of countries are used and time-varying ERPT measure is obtained with an application of DCC-GARCH to each country in the sample. Then the macroeconomic determinants of ERPT are examined by making use of both cross country and time variations in a panel regression model. The time varying structure of ERPT clearly shows that the ERPT degree has been low over the last three decades and declining dramatically since mid-1990s. Further, ERPT responds positively to average inflation and inflation rate volatility while negatively to exchange rate volatility, the degree of openness and output gap.

Keywords: Exchange rate pass-through; DCC-GARCH model; Panel threshold regression (search for similar items in EconPapers)
JEL-codes: C13 E31 F31 F41 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1016/j.iref.2015.01.007

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