Nonlinearities In The Exchange Rate Pass-Through: The Role Of Inflation Expectations

Journal article


Anderl, C. and Caporale, G. (2022). Nonlinearities In The Exchange Rate Pass-Through: The Role Of Inflation Expectations. International Economics. 173, pp. 86-101. https://doi.org/10.1016/j.inteco.2022.10.003
AuthorsAnderl, C. and Caporale, G.
Abstract

This paper investigates nonlinearities in the exchange rate pass-through (ERPT) to consumer and import prices by estimating a smooth transition regression model with different inflation expectations regimes for five inflation targeting countries (the UK, Canada, Australia, New Zealand and Sweden) and three non-targeters (the US, the Euro-Area and Switzerland) respectively over the period January 1993-August 2021. Both market and survey measures of inflation expectations are used as the transition variable, and the nonlinear model is also assessed against a benchmark linear model. The pass-through to both consumer and import prices is found to be stronger in the nonlinear model and in some cases is close to being complete. Also, it is stronger in regime 2, i.e. when markets and consumers expect high inflation rates in the future; this suggests that anchoring inflation expectations helps to reduce the ERPT. Finally, inflation expectations appear to affect the ERPT more in inflation targeting countries.

Year2022
JournalInternational Economics
Journal citation173, pp. 86-101
PublisherElsevier
ISSN2542-6869
Digital Object Identifier (DOI)https://doi.org/10.1016/j.inteco.2022.10.003
Publication dates
Print22 Oct 2022
Publication process dates
Accepted11 Oct 2022
Deposited11 Oct 2022
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Open
Accepted author manuscript
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https://openresearch.lsbu.ac.uk/item/922w9

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