Revisiting the role of inflation environment in exchange rate pass-through: A panel threshold approach

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper sheds new light on the role of inflation regime in explaining the extent of exchange rate pass-through (ERPT) into import prices. In order to classify his sample of 24 developing countries by regimes of inflation, Barhoumi [(2006), "Differences in long run exchange rate pass-through into import prices in developing countries: An empirical investigation", Economic Modeling, 23 (6), 926-951.] chose an arbitrary threshold of 10% to split sample between high and low inflation regimes. For more accuracy, our study proposes to use a panel threshold framework where a grid search is used to select the appropriate threshold value. In a larger panel-data set including 63 countries over the period 1992-2012, we find that there are two thresholds points that are well identified by the data, allowing us to split our sample into three inflation regimes. When estimating the ERPT for each group of countries, we point out a strong regime-dependence of pass-through to inflation environment, that is, the class of countries with higher inflation rates experiences the higher degree of ERPT. Terms of use: Documents in JEL: AbstractThis paper sheds new light on the role of inflation regime in explaining the extent of exchange rate pass-through (ERPT) into import prices. In order to classify his sample of 24 developing countries by regimes of inflation, Barhoumi [(2006), "Differences in long run exchange rate pass-through into import prices in developing countries: An empirical investigation", Economic Modeling, 23 (6), 926-951.] chose an arbitrary threshold of 10% to split sample between high and low inflation regimes. For more accuracy, our study proposes to use a panel threshold framework where a grid search is used to select the appropriate threshold value. In a larger panel-data set including 63 countries over the period 1992-2012, we find that there are two thresholds points that are well identified by the data, allowing us to split our sample into three inflation regimes. When estimating the ERPT for each group of countries, we point out a strong regime-dependence of pass-through to inflation environment, that is, the class of countries with higher inflation rates experiences the higher degree of ERPT.J.E.L classification: C23, E31, F31, F40

The dynamics of exchange rate pass-through to domestic prices in Turkey

“…We can see that long-run positive effect of decreasing is greater than negative effects of increasing in domestic production. The finding that exchange rate would affect consumer price at positive direction is consistent with findings of Choudhri and Hakura (2006), Devereux and Yetman (2010), Shintani et al (2013), Mohammed et al (2015), Cheikh and Louhichi (2016) in the literature. However, it conflicts with findings of Mwase (2006), Frimpong and Adam (2010), Saha and Zhang (2013), Peón and Brindis (2014).…”

“…The empirical findings show that the consumer price increases in response to an appreciate foreign exchange rates but the exchange rate pass-through involves a negligible reaction on producer price index. Cheikh and Louhichi (2016) have used the panel data over the 1992-2012. They point out a strong regimedependence of pass-through to inflation environment, that is, the class of countries with higher inflation rates experiences the higher degree of exchange rate pass-through.…”

“Too‐Small‐To‐Survive” versus “Too‐Big‐To‐Fail” banks: The two sides of the same coin

“…For instance, Wang and Huang () estimate the cost efficiency scores of the Taiwanese commercial banking sector and find that the technologies that the banks employ in their production function can be splitted into three different regimes based on a double threshold they specify. Similarly, Ben Cheikh and Louhichi () examine the role of inflation in explaining the degree of exchange‐rate pass through into import prices and the related monetary policy issues based on 63 economies and provide evidence of two inflation threshold levels. In what follows, we extend the single threshold model (Equation ) to its double threshold counterpart in order to test the existence of a TSTS and a TBTF double size threshold.…”

The Pass‐through of Exchange Rate in the Context of the European Sovereign Debt Crisis

“…Most of the few empirical works dealing with nonlinearities have used nonlinear threshold models, where the transition across regimes is abrupt (e.g. Correa and Minella, ; Ben Cheikh and Louhichi, ). Nevertheless, a threshold framework would be more appropriate at the microeconomic level where a single foreign firm is setting prices.…”