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Reginaldo Pinto Nogueira, Jr.
''A causality test of inflation environment and lower exchange rate pass-through''
( 2014, Vol. 34 No.3 )
Recent literature has argued that exchange rate pass-through (ERPT) into inflation has been declining following a dramatic change in inflation environment during the 1990s. We formally check this hypothesis for a sample of 12 emerging and developed economies, by making use of a state-space model that allows ERPT to be time-varying and dependent on the inflation environment, and testing whether inflation contains significant information about the future evolution of ERPT. The results reinforce the view of a smooth decline in the impact of exchange rates on inflation, but do not support the hypothesis that lower inflation precedes this declining ERPT.
Keywords: Exchange Rate Pass-Through, State-space Models, Causality Tests.
JEL: F3 - International Finance: General
F4 - Macroeconomic Aspects of International Trade and Finance: General
Manuscript Received : May 21 2014 Manuscript Accepted : Aug 06 2014

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