Asymmetric Exchange Rate Pass-Through in the Euro Area: New Evidence from Smooth Transition Models

Cheikh, Nidhaleddine Ben

doi:10.5018/economics-ejournal.ja.2012-39

Cited by 28 publications

(29 citation statements)

References 19 publications

(25 reference statements)

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“…The business‐cycle dependence of exchange rate pass‐through has been addressed in: (i) Goldfajn and Werlang (), who employ a linear panel for 71 countries in which they include a cyclical measure of output; which confirms that pass‐through effects are stronger during times of expansion than during weak growth periods; (ii) Ben Cheikh () who uses nonlinear smooth transition regression models to reveal a significant business cycle dependence for 6 of 12 euro area countries; (iii) Donayre and Panovska () who present a Bayesian threshold vector autoregressive model for Canada and Mexico, where the same nonlinear effect is found. An explicit reference to capacity constraint‐type theory cannot be found as of yet in such papers about state‐dependent exchange rate pass‐through, but the underlying rationale can sometimes be read ‘between the lines’.…”

Section: Empirical Analysismentioning

confidence: 99%

Mind the Output Gap: The Disconnect of Growth and Inflation during Recessions and Convex Phillips Curves in the Euro Area

Gross

Semmler²

2018

Oxf Bull Econ Stat

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We develop a theoretical model that features a business cycle‐dependent relation between output, price inflation and inflation expectations, augmenting the model by Svensson (1997) with a nonlinear Phillips curve that reflects the rationale underlying the capacity constraint theory (Macklem, 1997). The theoretical model motivates our empirical assessment, based on a regime‐switching Phillips curve and a regime‐switching monetary structural VAR, employing different filter‐based, semi‐structural model‐based and Bayesian factor model‐implied output gaps. The analysis confirms the presence of a convex relationship between inflation and the output gap, meaning that the coefficient in the Phillips curve on the output gap recurringly increases during times of expansion and abates during recessions. Sign‐restricted monetary policy shocks based on a regime‐switching monetary SVAR reveal that expansionary monetary policy induces less pressure on inflation at times of weak as opposed to strong growth; thereby rationalizing relatively stronger expansionary policy, including unconventional volume‐based policy, during times of deep recession. A further augmented model shows that an effective euro exchange rate shock, too, implies business cycle state‐dependent responses, with more upward pressure on prices arising from unexpected currency depreciation at times of expansion than during recession phases.

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Section: Empirical Analysismentioning

confidence: 99%

Mind the Output Gap: The Disconnect of Growth and Inflation during Recessions and Convex Phillips Curves in the Euro Area

Gross

Semmler²

2018

Oxf Bull Econ Stat

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“…Several studies have shown that ERPT is stronger for large exchange rate changes, a kind of nonlinear response typically associated with menu costs (Pollard and Coughlin, 2004;Posedel and Tica, 2009;Przystupa and Wrobel, 2011;Ben Cheikh, 2012;Bussière, 2013). Macroeconomic risk has also been identified as a factor influencing ERPT.…”

Section: Introductionmentioning

confidence: 99%

Heads I win; Tails you lose: Asymmetry in Exchange rate Pass-through into Import Prices

Brun-Aguerre¹,

Fuertes

Greenwood‐Nimmo

2016

Journal of the Royal Statistical Society Series A: Statistics in Society

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We analyse exchange rate pass-through into import prices for a large group of 33 emerging and developed economies from 1980Q1 to 2010Q4. Our error correction models permit asymmetric pass-through for currency appreciations and depreciations over three horizons of interest: on impact, in the short run and in the long run. We find that depreciations are typically passed-through more strongly than appreciations in the long-run, suggesting that exporters may exert a degree of long-run pricing power. This asymmetry is stronger in economies which are more import dependent but is moderated by freedom to trade and a positive output gap. Given that this pass-through asymmetry is welfare-reducing for consumers in the destination market, a key macroeconomic implication is that import-dependent economies, in particular, can benefit from trade liberalisation.

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“…More specifically, countries with higher inflation rates tend also to have a higher degree of exchange‐rate pass‐through to prices. Ben Cheikh () and Ben Cheikh and Rault () explore the Taylor hypothesis in euro area countries and find mixed results, depending on the sample size…”

Section: Introductionmentioning

confidence: 99%

“…This technique allows the regression coefficients to change gradually, with the shape of a logistic function, when moving from one regime to another. See Ben Cheikh () and Nogueira and Len‐Ledesma () for an application of this model to time series of individual countries. We consider this an interesting avenue for future research.…”

mentioning

confidence: 99%

Nonlinear exchange‐rate pass‐through in emerging markets

Caselli

Roitman

2019

International Finance

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This paper documents nonlinearities and asymmetries in the transmission of exchange rate fluctuations to prices in a panel of 27 emerging markets for the period 1990–2013. Using local projection techniques, we find evidence of asymmetry in the extent of exchange‐rate pass‐through during episodes of appreciation relative to episodes of depreciation. We then test for the presence of a threshold that can lead to nonlinearities when the exchange rate experiences a large depreciation. The findings suggest that the pass‐through becomes nonlinear when the exchange rate depreciates by more than 24%. We also find that, in line with the literature, the adoption of inflation targeting reduces the degree of exchange‐rate pass‐through. These results are robust to various econometric specifications that account for the presence of outliers and potential endogeneity concerns.

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Asymmetric Exchange Rate Pass-Through in the Euro Area: New Evidence from Smooth Transition Models

Cited by 28 publications

References 19 publications

Mind the Output Gap: The Disconnect of Growth and Inflation during Recessions and Convex Phillips Curves in the Euro Area

Mind the Output Gap: The Disconnect of Growth and Inflation during Recessions and Convex Phillips Curves in the Euro Area

Heads I win; Tails you lose: Asymmetry in Exchange rate Pass-through into Import Prices

Nonlinear exchange‐rate pass‐through in emerging markets

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