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| Mototsugu Shintani, Akiko Terada-hagiwara and Tomoyoshi Yabu |
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| ''Exchange rate pass-through and inflation: a nonlinear time series analysis'' |
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| 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. |
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| Keywords: Import prices, inflation indexation, pricing-to-market, smooth transition autoregressive models, sticky prices. |
JEL: E3 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
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| Manuscript Received : Oct 10 2012 | | Manuscript Accepted : Oct 31 2012 |
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