Revisiting the role of inflation environment in exchange rate pass-through: A panel threshold approach

- We shed new light on the role of inflation regimes in explaining the extent of exchange rate pass-through into import prices.
- We use a panel threshold framework where a grid search is used to select the appropriate threshold value.
- Two threshold points are identified by the data allowing us to split our sample into three inflation regimes.
- We point out a strong regime-dependence of pass-through to inflation environment.
- The class of countries with higher inflation rates experiences the higher degree of ERPT.

This paper sheds new light on the role of inflation regimes in explaining the extent of exchange rate pass-through (ERPT) into import prices. In order to classify the 24 developing countries included in his study, Barhoumi (2006) chose an arbitrary threshold of 10% to split the sample between high and low inflation regimes. For more accuracy, our study uses a panel threshold framework where a grid search is used to select the appropriate threshold value. In a larger panel-data set including 63 countries over the 1992-2012 period, we find that there are two threshold points identified by the data, allowing us to split our sample into three inflation regimes. When estimating the ERPT for each group of countries, we point out a strong regime-dependence of pass-through to inflation environment, that is, the class of countries with higher inflation rates experiences the higher degree of ERPT.