Production State-Dependent Non-Linear Behavior of Exchange Rate Pass-Through in Iran

Document Type : Original Article

Authors

1 Professor of Economics, School of Economics, Management & Social Sciences, Shiraz University (Corresponding Author)

2 MA in Economics, School of Economics, Management & Social Sciences, Shiraz University

Abstract

The purpose of this study is to investigate the possibility of non-linear behavior of exchange rate pass-through in the states of boom and recession in Iran. To the best of our knowledge, this issue has not studied for Iran. To this end, using monthly data for the period of 2002:4-2017:3, we estimate a structural threshold vector autoregressive (STVAR) model. Our endogenous variables include exchange rate, import price index, producer price index, consumer price index, industrial production index, and the interest rate. The results show that an increase in exchange rate has positive impacts on import price, producer price and consumer price indices. The impulse-response functions indicate that the reactions of the import price, the producer price and the consumer price to exchange rate shock are higher in the boom than that in the recession. Hence, our finding confirms the non-linear behavior of the exchange rate pass-through in Iran. Moreover, the degree of exchange rate pass-through in Iran is incomplete. The results show that the policymaker should take into consideration the importance of non-linear behavior of exchange rate pass-through when conducting an exchange rate policy in Iran.

Keywords

References

Aleem, A., & Lahiani, A. (2014). A threshold vector autoregression model of exchange rate pass-through in Mexico. Research in International Business and Finance, 30, 24-33.
- Arabmazar, A., & Golmoradi, H. (2010), An investigation of the sources of real exchange rate and inflation fluctuations in Iran. Journal of Economics and Modeling, 2, 75-103(In Persian).
- Asgharpur, H., Mehdiloo, A. (2014). The Impact of Inflationary Environment on Exchange Rate Pass- Through on Import Prices in Iran: Markov–Switching Approach. Quarterly Journal of Economic Research and Policies, 22 (70), 75-102 (In Persian).
- Baharumshah, A. Z., Sirag, A., & Soon, S. V. (2017). Asymmetric exchange rate pass-through in an emerging market economy: The case of Mexico. Research in International Business and Finance, 41, 247-259.
- Bahrami, J., Mohammadi, T., Bozorg, S. (2014). Asymmetric Exchange Rate Pass-Through to Domestic Price Indexes with the Approach of SVAR. Iranian Journal of Economic Research, 19(60), 37-65 (In Persian).
- Balke, N.S. (2000). Credit and economic activity: credit regimes and nonlinear propagation of shocks. Review of Economics and Statistics, 82(2), 344-349.
- Ben Cheikh, N. (2012). Nonlinear mechanism of the exchange rate pass-through: Does business cycle matter? (No. 41179). University Library of Munich, Germany.
- Bussiere, M. (2013). Exchange rate pass‐through to trade prices: The role of nonlinearities and asymmetries. Oxford Bulletin of Economics and Statistics, 75(5), 731-758.
- Campa, J. M., & Goldberg, L. S. (1999). Investment, pass‐through, and exchange rates: a cross‐country comparison. International Economic Review, 40(2), 287-314.
- Campa, J. M., & Goldberg, L. S. (2005). Exchange rate pass-through into import prices. Review of Economics and Statistics, 87(4), 679-690.
- Caselli, F. G., & Roitman, A. (2016). Non-Linear Exchange Rate Pass-Through in Emerging Markets (No. 16/1). International Monetary Fund.
- Devereux, M. B., & Yetman, J. (2010). Price adjustment and exchange rate pass-through. Journal of International Money and Finance, 29(1), 181-200.
- Donayre, L., & Panovska, I. (2016). State-dependent exchange rate pass-through behavior. Journal of International Money and Finance, 64, 170-195.
- Dornbusch, R. (1987). Exchange Rates and Prices. American Economic Review, 77(1), 93-106.
- Ebrahimi, S., Madanizadeh, S. (2016). Changes in Exchange Rate Pass-Through in Iran. Journal of Applied Economics Studies in Iran, 5(18), 147-170 (In Persin).
- Flamini, A. (2007). Inflation targeting and exchange rate pass-through. Journal of International Money and Finance, 26(7), 1113-1150.
- Goldberg, P. K., & Knetter, M. M. (1997). Goods Prices and Exchange Rates: What Have We Learned? Journal of Economic Literature, 35(3), 1243-1272.
- Hansen, B. E. (1996). Inference when a nuisance parameter is not identified under the null hypothesis. Econometrica: Journal of the econometric society, 64(2), 413-430.
- Kazerooni, A., Salmani, B., Feshari, M. (2012). The Impact of Exchange Rate Volatility on the Exchange Rate Pass-Through in Iran (TVP Approach). Journal of Applied Economics Studies in Iran, 1(2), 85-114 (In Persian).
- Krugman, P. (1986). Pricing to Market when the Exchange Rate Changes (No. 1926). National Bureau of Economic Research, Inc.
- Laflèche, T. (1997). The impact of exchange rate movements on consumer prices. Bank of Canada Review, 1996-1997(Winter), 21-32.
- Lee, J., & Strazicich, M. C. (2003). Minimum Lagrange multiplier unit root test with two structural breaks. Review of economics and statistics, 85(4), 1082-1089.
- Magee, S. P. (1973). Currency contracts, pass-through, and devaluation. Brookings Papers on Economic Activity, 1973(1), 303-325.
- Rasekhi S., Montazeri, M. (2016). The Impact of Macroeconomic Instability on Exchange Rate Pass Through: Some Evidence from Smooth Transition Regression (STR) Model.Journal of Economic Modeling Research, 6 (22), 7-31 (In Persian).
- Shajari, H,. Tayebi, K., & Jalali, A. (2001). Analysis of Exchange rate pass-through in Iran, Danesh and Tousea, 16, 51-76 (In Persian).
- Shintani, M., Terada-Hagiwara, A., & Yabu, T. (2013). Exchange rate pass-through and inflation: A nonlinear time series analysis. Journal of International Money and Finance, 32, 512-527.
- Tamizi A R. (2015). Analysis of Exchange Rate Pass-Through to Export Prices and the Impact of Inflation, and Income on It in Iran and Trading Partners: A GMM Estimator Approach. Quarterly Journal of Economic Research and Policies, 23 (73), 111-128 (In Persian).
- Taylor, J. B. (2000). Low inflation, pass-through, and the pricing power of firms. European economic review, 44(7), 1389-1408.

Files

Share

How to cite

Statistics