Abstract:
There are various causes for inflation in macroeconomics. One of the important channels of experiencing inflation is through the international economy caused by external shocks. In this context, the impact of exchange rate volatilities on domestic prices known as Exchange Rate Pass-Through (ERPT) plays a vital role.
The present paper deals with the impact of Exchange Rate Pass-Through on inflation in Iran. To do so, using a monthly time series data for the period 1983: 1-2014: 9, a Threshold Regression has been applied to estimate the relevant model. The results indicate a growth rate of monthly nominal exchange rate of 9.1 percent acts as a threshold rate. In other words, ERPT to domestic prices above the threshold is statistically significant whereas below the threshold, is not statistically significant.
Therefore, due to the fact that one of the main functions of the central bank is to maintain a stable currency value it is very important to pay attention to the impact of Exchange Rate Pass-Through and its threshold effects in implementation monetary policies to curb inflation.
Machine summary:
"For this reason, the study of the effect of exchange rate on inflation was noticed by some economics, such as Kent & Dwyer (1993), Han & Suh (1995), McCarthy (1999), Taylor (2000), Choudhri & Hakura (2001), Leigh & Rossi (2002), Mwase (2006), Volkan & Korap (2007), Sek & Kapsalyamova (2008), Naz, et al.
They found Inflation Targeting policy running in many developed countries from 1990’s which can lead to decreasing exchange rate pass- through degree or decreasing the transferring effect of nominal exchange rate changes based on general prices level of imported consumer goods.
Lin & Wu (2012) in a study using Threshold Autoregressive (TAR) investigated the effect of exchange rate instability and inflationary environment on the degree of exchange rate pass- through in Taiwan during the years 1980-2008.
The results of estimation show that with transition to the high instability regime, degree of exchange rate pass- through has increased and inflationary environment has also a significant and positive impact on the price index of imported goods.
Donayre & Panovska (2016) estimate a Bayesian threshold vector autoregression (TVAR) to study the relationship between exchange rate pass-through and economic activity in Canada and Mexico.
In order to examine threshold effects of exchange rate pass-through on inflation in Iran, following Posedel & Tica (2009), Enders (2012) and Alaabed & Masih (2016) the following model is used: (View the image of this page) In which, inflation π is a function of nominal exchange rate growth."