Estimation of Monetary Regimes Persistence and Inflationary Environment and It’s Effect on the Exchange Rate Pass-Through: The Case of Developing Countries with Exchange Rate Anchor Monetary Regimes

Document Type : Original Article


1 Associate Professor of Economics, Faculty of Economics, Allameh Tabataba'i University, Tehran, Iran

2 Associate Professor of Economics, Faculty of Economics, Kharazmi University, Tehran, Iran

3 Ph.D. Candidate in Economics, Faculty of Economics, Allameh Tabataba'i University, Tehran, Iran


The main purpose of this study is to investigate the effect of monetary system survival (as an indicator for monetary policy stability) and inflationary environment on exchange rate pass-through (as measure of transitional effects of exchange rate fluctuations on the import price index) in 9 developing countries during 1999-2019. To this purpose, the inflationary environment index is estimated by Markov-switching model and its effect on monetary policy stability is estimated by Survival Model Approach. Then, the risk of monetary system failure is estimated by WEIBULL method and in the following, the effect of this variable with other explanatory variables is estimated by ARDL method on exchange rate pass-through. The results show the negative effect of the inflationary environment on the monetary system survival. Also, the monetary system survival, the inflationary environment, the nominal effective exchange rate and its instability will increase the exchange rate pass-through.


- Aguerre, R.B., Fuertes, A.M. & Phylaktis, K. (2012). Exchange rate pass-through into import prices revisited. Journal of International Money, 31(3),818-44.
- Amiti, M. Itskhoki, O. & Konings, J. (2014). Importers, exporters and exchange rate disconnect. American Economic Review,104(7), 1949-1979.
- Bai. J. & Ng. S. (2010). Unit root tests with cross-section dependence. Economics Theory, (26)4: 1088-1114.
- Barakchian, M., Barkish, A. & Valizade, A. (2018). Estimation of exchange rate pass-through: The Effects of Exchange Rate Fluctuations on Consumer Price Indicator. Iran Journal of Economic Research and Politics, 28(96), 33-64 (In Persian).
- Chang, Y. (2002). Nonlinear IV unit root tests in panels with cross-sectional dependency. Journal of Econometrics, 110(2), 261-292.
- Chang, Y. (2004). Bootstrap unit root tests in panels with cross-sectional dependency. Journal of Econometrics, 120, 263-293.
- Ceglowski, J. (2010). Exchange rate pass-through to bilateral import prices. Journal of international Money & Finance, 29(8), 1637-1651.
- Chen, N. & Juvenal, L. (2014). Quality, trade and exchange rate pass-through. International Monetary Fund, Working paper No.14/42.
- Choudhri, E.U., & Hakura, D.S. (2006). Exchange rate pass-through to domestic prices: dies the inflationary environment matter? Journal of international money and finance, 25(4), 614-639.
- Coulibaly. D & Kempf. H. (2015). Does inflation targeting decrease exchange rate pass-through in emerging countries?. CES Working paper1/27.
- Cox, D.R. (1972). regression Models and life-table (with discussion). Royal Satate Soci, 34, 187-220.
- Devereux, M.B., Engel, Ch. & Strogaad, P.E. (2003). Endogenous exchange rate pass-through when nominal prices are set in advance. Working paper, No 9543.
- Ebrahimi, S. & Madanizadeh, S.A. (2016). Changes of exchange rate pass-through and it’s effective factors in Iran. Iran Applied Economics Study Quarterly,18, 147-170 (In Persian).
- Eslamlouian, K. Mahzoun, Z. (2017). Production State-Dependent Non-Linear Behavior of Exchange Rate Pass-Through in Iran. Journal of Economic and Modeling, 9(4), 1-32 (In Persian).
- Feenstra, R.C. (2004). Advanced international trade: Theory and evidence.
Princeton University Press.
 - Frimpong, S. & Adam, A.M. (2010). Exchange rate pass-through in Ghana. International business research, 3(2), 186-92.
- Froot, K.A. & Klemerer, P.D. (1989). Exchange rate pass-through when market share matters. The American Economic Review, 79(4), 637-654.
- Goldberg, L.S & Campa, J.M. (2010). The sensitivity of the CPI to exchange rates: Distribution margins, imported inputs and trade exposure. The Review of Economics and Statistics, 92(2), 392-407.
- Granger, C.W.J. & Newbold, P. (1986). Spurious regressions in econometrics. Journal of Econometrics, 2, 111-120.
- Ihrig, J. & Gagnon, J.E. (2006). Monetary policy and exchange rate pass-through. International Finance, 9(4), 315-338.
- Im, K.S., Pesaran, M.H., Shin, Y. (2003) Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115, 53-74.
- International Monetary Fund (IMF). (1999-2020). Annual Report on Exchange arrangement and Exchange Restrictions.
- Junttila, J. & Korhonen, M. (2012). The role of inflation regime in the exchange rate pass-through to import Prices. International Review of Economics and Finance, 24, 88-96.
- Kao, C. & Chiang, M.H. (2000). On the estimation and inference of a co-integrated regression in panel data. Advance in econometrics, 15, 179-222.
- Karavias, Y., & Tzavalis, E. (2014). Testing for unit roots in short panels allowing for a structural break. Computational Statistics & Data Analysis 76, 391–407.

- Kazerouni, A., Asgharpour, H. & Mirani, N. (2015). The Impact of Inflationary Environment on Exchange Rate Pass- Through to the Import Price Index in Iran. Quarterly Journal of Applied Theories of Economics, 2(2), 155-178 (In Persian).

- Kiefer, N.M. (1988). Economic duration data and hazard functions. Journal of economic literature, 26(2), 646-679.
- Krugman, P. (1993). What do we need to know about the international monetary system? International Economics Section, Department of Economic, No.190.
- McCarthy, J. (2007). Pass-through of exchange rates and import prices to domestic inflation in some industrialized economies. Eastern Economic Journal, 33(4), 511-537. 
- Mesbahi, M., Asgharpour, H., Haghighat, J., Kazerouni, S.A., & Fallahi, F. (2017). A study of the degree of exchange rate fluctuations in import prices in Iran with an emphasis on the role of oil revenue uncertainty (nonlinear approach). Economic Modeling Quarterly, 37(1), 77-100 (In Persian).
- Mishkin, F.S. (2017). Exchange rate pass-through & Monetary Policy. NBER Working Papers. PP. 1-21.
- Musavi. M.R. & Sobhanipur. M. (2005). Investigating the exchange rate pass-through in Economic of Iran. Economic Research, 129-149 (In Persian).
- O’Connell, P. (1998). The overvaluation of purchasing power parity”, Journal of International Economics, 44, 1-12.
- Oke, M.O. & Adetan, T.T. (2018). An empirical analysis of the departments of exchange rate in Nigeria. International Journal of Scientific Research and Management, 6(5), 412-423
- Pedroni, P. (2004). Panel cointegration, asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric theory, 3, 597-625.
- Romer. D. (1996). Advanced Macroeconomics. McGraw-Hill, 4th Edition.
- Shakeri, A. (2013). Macroeconomics theories and policies. Publication of Vafa, Tehran (In Persian).
- Sharifazadeh, M.R. & Haghighat, A. (2000). Effective factors on exchange rate in Iran. Economics and Management, 66, 31-43 (In Persian).
- Sowah, A.N. (2009). Is there a link between exchange rate pass-through & the monetary regime: Evidence from sub-Saharan Africa & Latin America. Journal of International Atlantic Economic Society, 25, 996-309.
- Takhtamanova, Y.F. (2008). Understanding changes in exchange rate pass-through. Federal Reserve Bank of Sanfrancisco. 32(4), 1118-1130.
- Taylor, J.B. (2000). Low inflation, pass-through and the pricing power of firms. European economics Review, 44(7), 1389-1408.
- Wickermasinghe, G. & Silvapulle, P. (2003). Role of exchange rate volatility in exchange rate pass-through to import prices: some evidence from Japan. Department of Econometrics and Business Statistics, Monash University, 1-29.
- Yang, J. (1997). Exchange rate pass-through in US manufacturing industries. Review of Economics and Statistics, 79 (1), 95-104.
Yazdani, M. & Mohammadi, M. (2016). Effects of Exchange Rate Unification on Macroeconomic Variables in Emerging Market Countries: Difference-in-Differences Approach. Journal of Monetary-Bank Researches. 10(32), 173-198 (In Persian).