Exchange Rate Pass-Through and Inflation: A Nonlinear Time Series Analysis
Working Paper No. 12-W07R
Mototsugu Shintani, Akiko Terada-Hagiwara and Tomoyoshi Yabu
This paper investigates the relationship between the exchange rate pass-through (ERPT) and inflation by estimating a nonlinear time series model. Based on 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 using the past inflation rate as a transition variable. We employ several U-shaped transition functions in the estimation of the time-varying ERPT to US 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
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