Abstract
We document a significant threshold cointegrating relationship among effective nominal exchange rates and import prices. Using quarterly data for five industries of 16 OECD countries, we find that the degree of pass-through improves dramatically from the 50% average documented in the literature once threshold effects are recognized. The results of our threshold cointegration model show that import prices respond faster and by a larger extent to nominal exchange rate shocks than is the case for more conventional models. These findings give empirical support to the hypothesis that an equilibrium rate of pass-through exists (e.g. [Bacchetta, P., & Van Wincoop, E. (2005). A Theory of the currency denomination of international trade, Journal of International Economics 67, 295-319; Devereux, M., Engel, C., & Storgaard, P. (2004). Endogenous exchange rate pass-through when nominal prices are set in advance, Journal of International Economics 63(2), 263-291]).
Original language | English |
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Pages (from-to) | 142-161 |
Number of pages | 20 |
Journal | International Review of Economics and Finance |
Volume | 18 |
Issue number | 1 |
DOIs | |
Publication status | Published - Jan 2009 |
Keywords
- Equilibrium pass-through
- Exchange rate pass-through
- Non-linear estimation
- OECD
- Threshold cointegration
ASJC Scopus subject areas
- Finance
- Economics and Econometrics