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Role of Exchange Rate Volatility in Exchange Rate Pass-Through to Import Prices: Some Evidence from Japan

Guneratne Wickremasinghe and Param Silvapulle ()

International Finance from University Library of Munich, Germany

Abstract: This paper investigates the effect of exchange rate volatility on the degree of exchange rate pass-through in Japan for the period January 1975 to June 1997. Although several studies put forward theoretical arguments for the volatility-domestic import price relationship, only a very few studies produced empirical evidence. The volatility of contractual currency based exchange rate index returns was modelled using GARCH-type processes with skewed student t-distribution, capturing the typical nature of exchange rate returns. Using a three-state regime switching threshold model, we examine the response of import prices, the degree of pass-through in particular, to different volatility regimes, low, medium and high. The results show that the exchange rate pass- through coefficient is significantly different across all three volatility regimes only during recession.

JEL-codes: F31 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-ifn
Date: 2004-06-21
Note: Type of Document - pdf; pages: 29
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Handle: RePEc:wpa:wuwpif:0406006