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Nonlinear mechanism of the exchange rate pass-through: Does business cycle matter?

By Nidhaleddine Ben Cheikh

Abstract

This paper examines the presence of nonlinear mechanism in the exchange rate pass-through (ERPT) to CPI inflation for 12 euro area (EA) countries. Using logistic smooth transition models, we explore the existence of nonlinearity with respect to economic activity along the business cycle. Our results provide a strong evidence of nonlinearity in 6 out of 12 EA countries with significant differences in the degree of ERPT between the periods of expansion and recession. However, we find no clear direction in this regime-dependence of pass-through to business cycle. In some countries, ERPT is higher during expansions than in recessions; however, in other countries, this result is reversed. These cross-country differences in the nonlinear mechanism of pass-through would have important implications for the design of monetary policy and the control of inflation in the EA context.

Topics: E31 - Price Level; Inflation; Deflation, C22 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models, F31 - Foreign Exchange
Year: 2012
DOI identifier: 10.2139/ssrn.2144003
OAI identifier: oai:mpra.ub.uni-muenchen.de:41271

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