Exchange Rate Pass-Through and Inflation:
A Nonlinear Time Series Analysis
Working Paper No. 09-W20
Mototsugu Shintani, Akiko Terada-Hagiwara, and Tomoyoshi Yabu
ABSTRACT [article]
This paper investigates the
relationship between the exchange rate pass-through (ERPT) and
inflation by estimating a nonlinear time series model. Using a
simple theoretical model of ERPT determination, we show that the
dynamics of ERPT can be well-approximated by a class of smooth
transition autoregressive (STAR) models with inflation as a
transition variable. We employ several U-shaped transition
functions in the estimation of the time-varying ERPT to U.S.
domestic prices. The estimation result suggests that declines in
the ERPT during the 1980s and 1990s are associated with lowered
inflation.
Keywords and Phrases: Import prices, inflation indexation,
pricing-to-market, smooth transition autoregressive models, sticky prices
JEL Classification Numbers: C22, E31, F31