Nonlinear exchange‐rate pass‐through in emerging markets

Abstract

AbstractThis paper documents nonlinearities and asymmetries in the transmission of exchange rate fluctuations to prices in a panel of 27 emerging markets for the period 1990–2013. Using local projection techniques, we find evidence of asymmetry in the extent of exchange‐rate pass‐through during episodes of appreciation relative to episodes of depreciation. We then test for the presence of a threshold that can lead to nonlinearities when the exchange rate experiences a large depreciation. The findings suggest that the pass‐through becomes nonlinear when the exchange rate depreciates by more than 24%. We also find that, in line with the literature, the adoption of inflation targeting reduces the degree of exchange‐rate pass‐through. These results are robust to various econometric specifications that account for the presence of outliers and potential endogeneity concerns.