Asymmetric effects of exchange rate variations: An empirical analysis for four advanced countries

This paper investigates possible asymmetries in the reaction of export and import prices to changes in the exchange rate for 4 advanced countries between the 1981q1 and 2011q2 period. This exercise is conducted using an asymmetric cointegrating autoregressive distributed lag (ARDL) model, with positive and negative partial sum decompositions of the nominal exchange rates. Our results show evidence of asymmetric ERPT to appreciations and depreciations, meaning that export and import prices respond differently depending on the direction of the exchange rate variation. In particular, we find that appreciations are more passed through to export and import prices than depreciations. This result has important implications in terms of monetary policy.