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

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