Nonlinearities in the Exchange Rate Pass-Through: The Role of Inflation Expectations

Christina Anderl and Guglielmo Maria Caporale

No 9544, CESifo Working Paper Series from CESifo

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 for import prices than for consumer prices. Both seem to be more responsive to exchange rate changes when market expectations of both consumers and producers are considered instead of expectations from consumer surveys only. Finally, inflation expectations appear to affect the ERPT more in inflation targeting countries.

Keywords: exchange rate pass-through; smooth transition regression; nonlinearities; inflation expectations (search for similar items in EconPapers)
JEL-codes: C22 F31 F41 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (2)

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Journal Article: Nonlinearities in the exchange rate pass-through: The role of inflation expectations (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9544

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