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Title:Is low inflation really causing the decline in exchange rate pass-through? PDF Logo
Authors:Nogueira Júnior, Reginaldo P.
León-Ledesma, Miguel A.
Issue Date:2010
Series/Report no.:School of Economics discussion papers 10,02
Abstract:Recent literature has argued that exchange rate pass-through (ERPT) into domestic inflation has been declining in many countries following a dramatic change in inflation environment during the 1990s. Available empirical results face two central challenges: (i) the evidence on declining ERPT is mostly based on sample-splitting approaches and hence subject to a degree of arbitrariness; and (ii) the link between a lower ERPT and inflation environment is usually based on simple correlation analysis and hence silent about temporal causality. We address these issues by making use of a state-space model that allows ERPT to be time-varying and dependent on the inflation environment.
Subjects:exchange rate pass-through
inflation
state-space models
causality tests
JEL:E42
E52
E58
F31
F41
Document Type:Working Paper
Appears in Collections:School of Economics Discussion Papers, University of Kent

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