Exchange Rate Pass-Through and the Frequency of Price Adjustment across Different Inflation Regimes

Pavle Petrović () and Zorica Mladenović ()

Panoeconomicus, 2015, vol. 62, issue 4, 409-427

Abstract: The paper explores the link between the inflationary environment and the size of the exchange rate pass-through (ERPT) into domestic prices, as inflation descends from an extreme, second highest and second longest hyperinflation in the 20th century, to high and then moderate inflation in Serbia. We found that ERPT decreases with a decline in the inflation level, variability and persistence, thus supplementing findings previously acquired in panel studies across countries. Our findings can be explained by surging empirical evidence on state contingent behavior of pricing, which indicates a sharp increase in the frequency of price adjustment as one moves from moderate, via high to hyperinflation, suggesting that the degree of price rigidities is a key determinant of the size and speed of ERPT. ERPT estimates are embedded in careful analysis of inflation episodes in Serbia, showing that hyper and high inflation episodes subscribe to the same, fiscal explanation, as opposed to the moderate inflation ones, where supply and demand shocks have been the main inflation drivers. Key words: Pass-through, Exchange rate, Inflation, State contingent behavior of pricing.JEL: E31, E52, F41.

Keywords: Pass-through; Exchange rate; Inflation; State contingent behavior of pricing (search for similar items in EconPapers)
Date: 2015
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