The Role of the Business Cycle in Exchange Rate Pass-Through: The Case of Finland

Nidhaleddine Ben Cheikh () and Christophe Rault

No wp1078, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: In this paper we investigate whether exchange rate pass-through (ERPT) responds nonlinearly to economic activity along the business cycle. Using quarterly data spanning the period 1975:1 to 2011:1, we explore the existence of nonlinearities in ERPT to CPI inflation for the Finnish economy. Within a logistic smooth transition framework, our investigations reveal a strong regime-dependence of pass-through, depending positively on economic activity. Besides, point estimates indicate that the long-run pass-through coefficient is equal to 0.15% (weakly significant) when GDP growth is below a threshold of 3%. However, when the Finnish economy’s growth rate speeds up - above the threshold of 3% - ERPT elasticity increases to 0.47%. These results provide some useful guidance on how policymakers should act over different phases of the business cycle. More specifically, monetary policy should factor in the nonlinear mechanism of ERPT over the business cycle in order to prevent exchange rate movements from fueling a continuous inflationary process.

Keywords: Exchange rate pass-through; Inflation; Business cycle; Smooth Transition Regression models (search for similar items in EconPapers)
JEL-codes: C22 E31 F31 (search for similar items in EconPapers)
Pages: pages
Date: 2014-06-01
New Economics Papers: this item is included in nep-fdg, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (2)

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Journal Article: The Role of the Business Cycle in Exchange Rate Pass-Through: The Case of Finland (2016)
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