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

Abstract

This paper investigates whether the exchange rate pass-through (ERPT) to CPI inflation is a nonlinear phenomenon for five heavily indebted euro area (EA) 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 German) 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 some threshold. For all the GIIPS countries, we reveal that the increasing of macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed a higher sensibility of CPI inflation to exchange rate movements. JEL:C22 AbstractThis paper investigates whether the exchange rate pass-through (ERPT) to CPI inflation is a nonlinear phenomenon for five heavily indebted euro area (EA) 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 German) 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 some threshold. For all the GIIPS countries, we reveal that the increasing of macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed a higher sensibility of CPI inflation to exchange rate movements.J.E.L classification: C22, E31, F31

Exchange rate uncertainty and import prices in the euro area

“…Similarly, an additional source of nonlinearity in the ERPT literature is time variation of the pass‐through (Cheikh & Rault, ; De Bandt & Razafindrabe, ; Donayre & Panovska, ; Nogueira & León‐Ledesma, ), which could also be transferable to the exchange rate uncertainty. The notion that uncertainty might have different effects in different periods is gaining popularity in the macro uncertainty literature (see, e.g., Castelnuovo & Pellegrino, ; Pellegrino, ).…”

Domestic and global output gaps as inflation drivers: What does the Phillips curve tell?

“…Acknowledging the potential differences in inflation processes, including, for instance, in inflation persistence or in exchange rate passthrough, we estimate the output gap effects separately for advanced and emerging economies. Importantly, our setup allows for non-linear effects of exchange rate changes, which have been shown to be of particular importance for emerging markets (Jašová, Moessner and Takáts, 2018) as the underlying pass-through process may be non-linear (Bussière, 2013;Cheikh and Rault, 2015).…”

Essays on International Macroeconomics and Monetary Policy

“…In particular, several recent papers (e.g. Shintani et al (2013), Ben Cheikh and Rault (2016), Cheikh and Louhichi (2016), Donayre and Panovska (2016)) have employed threshold models in order to understand whether the ERPT measure is higher or lower when the characteristics of interest exceed certain threshold levels. First, I use standard empirical methods commonly found in the ERPT literature to establish that the newly introduced data set shares in the empirical regularities typically found in the literature.…”