Asymmetric Exchange Rate Pass-Through in the Euro Area: New Evidence from Smooth Transition Models

Nidhaleddine Ben Cheikh

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Abstract

Abstract This paper examines the presence of asymmetric behavior in exchange rate passthrough (ERPT) to CPI inflation in 12 euro area (EA) countries. Using a class of nonlinear smooth transition models, the author tests for asymmetry with respect to the direction and the magnitude of exchange rate changes. On the one hand, the author finds only 5 out of 12 EA countries showing asymmetric pass-through related to exchange rate appreciations and depreciations. Results are somewhat mixed with no clear evidence about the direction of asymmetry. On the other hand, the author reports strong evidence that ERPT responds asymmetrically to the size of exchange rate changes as a result of presence of menu costs. The degree of ERPT is found to be higher for large exchange rate changes than for small ones in 9 out of 12 EA countries.

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References

1996Goods Prices and Exchange Rates: What Have We Learned?1988Testing Linearity Against Smooth Transition Autoregressive Models 2000Low inflation, pass-through, and the pricing power of firms 2005Exchange Rate Pass-Through into Import Prices 2002SMOOTH TRANSITION AUTOREGRESSIVE MODELS — A SURVEY OF RECENT DEVELOPMENTS 2001Nonlinear Mean‐Reversion in Real Exchange Rates: Toward a Solution To the Purchasing Power Parity Puzzles 1995EXCHANGE RATE PASS‐THROUGH 2000The Pass-Through from Depreciation to Inflation: A Panel Study

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