Evaluation Of Flexibility of the Exchange Rate Regime’s Effect on Pass-Through Phenomenon: An Application of the Multiple-Doses Matching Approach

Abstract

Exploring effects of the main determinants on exchange rate pass through is crucial for the adoption of various economic policies, including exchange rate stability as well as trade expansion. An exchange rate regime can be a source of exchange rate and price changes, which is substantial in the implementation of foreign exchange policies. Among the various factors affecting exchange rate pass through, the flexibility of exchange rate regime has received less attention in empirical studies. Accordingly, the present paper seeks to find out how different exchange rate regimes affect the exchange rate pass through, which is proxied by the import price. To answer this question, we have used the multiple-doses matching approach by estimating the dose-response functions, to evaluate the effect of an exchange rate regime on the pass through. To this purpose, we have used data of 118 developing countries employing four types of exchange rate regimes in 2021. The results obtained from the use of dose-response analysis show that there is a negative and significant relationship between the degree of exchange rate pass-through and the degree of flexibility of the exchange rate regime at the significance level of 5%, so that an increase in the flexibility of the exchange rate regime has resulted a decrease in the degree of exchange rate pass-through. As a result, the degree of exchange rate pass-through in the hard-pegged exchange rate regime has been higher than those of other regimes, while, it has been the lowest in the floating exchange rate regime.