Time-varying nature and macroeconomic determinants of exchange rate pass-through


ÖZKAN İ., ERDEN L.

INTERNATIONAL REVIEW OF ECONOMICS & FINANCE, vol.38, pp.56-66, 2015 (Peer-Reviewed Journal) identifier identifier

  • Publication Type: Article / Article
  • Volume: 38
  • Publication Date: 2015
  • Doi Number: 10.1016/j.iref.2015.01.007
  • Journal Name: INTERNATIONAL REVIEW OF ECONOMICS & FINANCE
  • Journal Indexes: Social Sciences Citation Index, Scopus
  • Page Numbers: pp.56-66
  • Keywords: Exchange rate pass-through, DCC-GARCH model, Panel threshold regression, UNIT-ROOT TESTS, PANEL-DATA, INFLATION, IMPORT, PRICES, COUNTRIES

Abstract

The objectives of this study are two-fold: i) to derive time-varying exchange rate pass-through (ERPT) degree and ii) investigate the macroeconomic determinants of the degree of ERPT. For this purpose, the study adopts a distinct methodology combining Dynamic Conditional Correlation-Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) and panel threshold regression analyses. The data from a large sample of countries are used and time-varying ERPT measure is obtained with an application of DCC-GARCH to each country in the sample. Then the macroeconomic determinants of ERPT are examined by making use of both cross country and time variations in a panel regression model. The time varying structure of ERPT clearly shows that the ERPT degree has been low over the last three decades and declining dramatically since mid-1990s. Further, ERPT responds positively to average inflation and inflation rate volatility while negatively to exchange rate volatility, the degree of openness and output gap. (C) 2015 Elsevier Inc. All rights reserved.