The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis

Nidhaleddine Ben Cheikh () and Christophe Rault

No 9467, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper investigates whether exchange rate pass-through (ERPT) into import prices is a nonlinear phenomenon for five heavily indebted Euro area countries, namely the so-called GIIPS group (Greece, Ireland, Italy, Portugal, and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus the German bund) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, i.e. when sovereign bond yield spreads exceed a given threshold. For almost all the GIIPS countries, we reveal that the increase in macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed higher sensitivity of import prices to exchange rate movements. For instance, the rate of pass-through in Greece is equal to 0.66% when the yield differential is below 2.13%, but beyond this threshold level, the sensitivity of import prices becomes higher and reaches full ERPT. Our findings raise the serious question of whether the exchange rate could be an effective tool to boost the trade balance and prevent deflationary threats when financial crisis hits.

Keywords: sovereign spreads; import prices; exchange rate pass-through; smooth transition models (search for similar items in EconPapers)
JEL-codes: C22 E31 F31 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2015-10
New Economics Papers: this item is included in nep-eec, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published - published in: International Journal of Finance and Economics, 2016, 21 (2), 154–166

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Related works:
Journal Article: The Pass‐through of Exchange Rate in the Context of the European Sovereign Debt Crisis (2016)
Working Paper: The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis (2016)
Working Paper: The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis (2015)
Working Paper: The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis (2013)
Working Paper: The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis (2013)
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