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Nidhaleddine Ben Cheikh
''Non-linearities in exchange rate pass-through: Evidence from smooth transition models''
( 2012, Vol. 32 No.3 )
This paper examines the presence of non-linear mechanism in the exchange rate pass-through (ERPT) to CPI inflation for 12 euro area (EA) countries. Using smooth transition regression (STR) model, we explore the existence of non-linearities with respect to the inflation environment. We find strong evidence that pass-through respond non-linearly to inflation level for 8 out of 12 EA countries, that is, the transmission of exchange rate is higher when inflation rate surpass some threshold. Our results provide a broad support to the hypothesis suggested by Taylor (2000) that ERPT is decreasing in a lower and more stable inflation environment.
Keywords: Exchange Rate Pass-Through, Inflation, Smooth Transition Regression Models, Euro Area
JEL: F4 - Macroeconomic Aspects of International Trade and Finance: General
E3 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
Manuscript Received : Jul 01 2012 Manuscript Accepted : Sep 16 2012

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